One of the interesting aspects of the meltdown in the crypto ecosystem is the fact that traditional finance remains almost completely unscathed.
Traditional financial institution exposure to crypto-assets, where it exists, appears to be limited by professional scepticism, good risk management practice, and effective regulatory mechanisms. All of these are working to insulate most banks and financial services firms from failures, whether these affect exchanges, cryptocurrencies themselves or financial services players with deeper crypto involvement.
The bank regulators are intent on keeping things this way, warning banking organizations that it is important that uncontrolled and unmitigated risks do not spread to the financial system.
Some of the risks that the regulators identify point to continuing concerns not only about the risks associated with assets that are volatile in nature, but also to the deep vulnerability of the sector to unscrupulous and dishonest players.
The statement explicitly warns of risks that include:
- Outright fraud and scams;
- Custody practices, redemptions, and ownership rights;
- Misrepresentation; and
- Other practices that may be unfair, deceptive, or abusive.
The regulators also draw attention to continuing concerns about liquidity and contagion risk. This risk is exacerbated by the interconnectedness between crypto-asset companies that may be engaging in “opaque lending, investing, funding, service and operational engagements”.
The regulators are careful to point out that banks should continue to service customers so long as what the customers are doing is legal and so long as the banks remain compliant. But they also indicate that holding crypto-assets as principal is “inconsistent with safe and sound banking practices”. It is difficult to imagine a more scathing assessment of the value of crypto-assets from any regulator.
