US regulators caution on cryptocurrency risks

Washington: US regulators have issued their first-ever joint warning to banks over the risks associated with the cryptocurrency market, local media reported. The watchdogs told financial institutions to be wary of potential fraud, legal uncertainty and misleading disclosures by digital asset firms, according to media reports. Banks were also cautioned over the 'contagion risk' from the sector.

It comes just two months after the collapse of trading platform FTX which sent shockwaves through the crypto industry.

The US Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency said they were closely monitoring the crypto activities of banking organisations.

"The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector," the statement said.

The regulators also said that issuing or holding crypto tokens, which are stored on public, decentralised networks was "highly likely to be inconsistent with safe and sound banking practices", The BBC reported.

Banks were also encouraged to take steps to avoid problems in the digital asset market spreading to the wider financial system.

"It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system," it added.

The statement comes after months of hesitancy by US financial industry watchdogs to issue uniform guidelines on cryptocurrencies, despite banks inviting clearer advice from regulators. The cryptocurrency industry was rocked by the collapse of FTX in November. It was the world's second largest cryptocurrency exchange and the entry point for millions of people into the digital asset market.