https://bonginoreport.com/economy/federal-reserve-recommends-banks-stay-away-from-crypto

Regulators advised banks and other financial institutions to avoid cryptocurrencies, a warning that comes after the implosion of digital asset company FTX and deliberations over a possible central bank digital currency in the United States.

A joint statement from the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency said that the nascent sector is characterized by “significant volatility” and possible fraud, warning executives of scams, legal uncertainties, and contagion between firms rocked by recent tumult in cryptocurrency markets.

“Given the significant risks highlighted by recent failures of several large crypto-asset companies, the agencies continue to take a careful and cautious approach related to current or proposed crypto-asset-related activities and exposures at each banking organization,” the document said. “The agencies have significant safety and soundness concerns with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector.”

Though the document clarified that offering services to cryptocurrency companies or otherwise engaging with the digital asset market is “neither prohibited nor discouraged,” the statement raised the specter of money laundering risks, which banks are zealous to prevent because of harsh penalties for executives considered negligent in discouraging the practice.

“The agencies will continue to closely monitor crypto-asset-related exposures of banking organizations,” the document added. “As warranted, the agencies will issue additional statements related to engagement by banking organizations in crypto-asset-related activities. The agencies also will continue to engage and collaborate with other relevant authorities, as appropriate, on issues arising from activities involving crypto-assets.”

Heightened pressure from regulators comes after cryptocurrency exchange platform FTX suddenly declared bankruptcy following a liquidity crisis, leading to bankruptcies among other exchange platforms. Sam Bankman-Fried, the founder of FTX, has been accused of money laundering and fraud for allegedly commingling user funds with sister trading firm Alameda Research and using the assets to make investments.

Officials at the Federal Reserve have long considered the creation of a central bank digital currency which, unlike bitcoin and other decentralized cryptocurrencies, would be managed by policymakers and tethered to the dollar. Federal Reserve Chair Jerome Powell has told lawmakers that his “mind is open” to a digital dollar, noting he was “legitimately undecided” on whether the “benefits outweigh the costs” of central bank digital currencies. “We would want very broad support in society and in Congress,” he remarked.

Shortly after FTX filed for bankruptcy, the Federal Reserve Bank of New York announced a partnership with leading financial institutions such as BNY Mellon and Mastercard to launch a digital dollar simulation. The test will “experiment with the concept of a regulated liability network,” a concept for a market infrastructure that would facilitate “digital asset transactions that connect deposits held at regulated financial institutions using distributed ledger technology.”

Critics of central bank digital currencies assert that digital assets present a number of privacy and security concerns. Republican members of the House Financial Services Committee have issued a series of principles that any potential digital dollar project must fulfill, including the establishment of privacy guarantees, the promotion of private sector innovation, and the protection of the dollar as the world’s reserve currency.

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