US watchdogs warn banks about the risk of dealing with cryptocurrencies

US watchdogs have issued their first ever joint warning to banks about the risks associated with the cryptocurrency market.

Oversight bodies have asked financial institutions to exercise caution against potential fraud, legal misinformation and misleading data by digital asset companies.

This comes just two months after the collapse of the FTX trading platform caused a massive shock in the cryptocurrency industry.

In the joint statement, the United States Central Bank, the Federal Deposit Insurance Corporation and the Currency Controller’s Office said that they were closely monitoring the encryption activities of banking organizations.

“Last year’s events were marked by significant volatility and vulnerabilities in the cryptocurrency sector,” the statement said.

The watchdogs also said that issuing or retaining cryptocurrencies, which are stored on public decentralized networks, is “very likely to be incompatible with safe and sound banking practices.”

Regulators also urged banks to take steps to avoid the spread of problems in the digital asset market to the broader financial system.

They added that “it is important that risks related to the cryptocurrency sector that cannot be mitigated or controlled do not transfer to the banking system”.

Tuesday’s statement comes after months of reluctance by US financial industry watchdogs to issue uniform guidance on cryptocurrencies, despite banks calling for clearer advice from regulators.

FTX Shock

The cryptocurrency industry was affected by the collapse of FTX in November.

FTX was the world’s second largest cryptocurrency exchange and the entry point for millions of people into the digital asset market.

On Tuesday, former FTX CEO Sam Bankman Fried officially denied accusations that he had defrauded customers and investors.

He pleaded not guilty in a United States court to allegations that he had taken clients’ deposits at FTX to finance his other company Alameda Research, buy property and make political donations.

Two of Bankman Fried’s closest colleagues have already pleaded guilty and are cooperating with the investigation that has rocked the entire cryptocurrency industry.

Bankman Fried is a prominent figure in the sector and is known for his political ties, celebrity support and bailouts for other struggling companies.

The United States accused him of building a “house of paper on the basis of deception while telling investors it was one of the safest buildings in cryptocurrencies.”