Federal regulators warn banks to be careful with crypto

Since the cryptocurrency exchange FTX collapsed late last year, demands for regulation of the industry have become much higher.

Congress has talked about it a lot, but in the current state of division, legislation is unlikely. It remains to be seen what they will do with federal regulatory agencies.

On Thursday, three of them came together and released a statement warning banks to be careful about adding too much cryptocurrency to their balance sheets. This is the second statement on crypto in as many months from the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

“Bank regulators are focused on the interconnection between crypto banks and traditional banks,” said Timothy Massad, director of the Digital Assets Policy Project at Harvard and former head of the Commodity Futures Trading Commission. “And they have wanted to limit these to protect the traditional banking system.”

Those limits are why regulators believe the FTX fiasco didn’t cause more damage to the economy, he said.

Now the agencies are highlighting liquidity risk when it comes to crypto. But none of this is technically new regulation of crypto, according to Ananya Kumar, who tracks cryptocurrency regulation globally at the Atlantic Council.

“So the way these agencies engage in this is through their oversight capacity as regulators of traditional financial institutions, not as regulators of crypto,” she said.

It is unclear who can regulate the crypto industry. Securities and Exchange Commission? Commodity Futures Trading Commission?

“When we talk about some of the other agencies, namely the SEC and the CFTC, in this area, we know there’s an ongoing turf war,” Kumar said.

Bank regulators don’t have that problem, said Jarrod Loadholt, who works on crypto issues at the law firm Ice Miller.

“There are very clearly defined lines of who does what between the FDIC, the OCC and the Federal Reserve,” he said.

They’re not saying banks can’t or shouldn’t get into crypto, but they’re saying in unison what many experts have been telling consumers: Just be careful.