Crypto highlighted as ‘novel and complex’ risk to US banks: FDIC report

August 15, 2023 Coin Telegraph

The Federal Deposit Insurance Corporation has warned that uncertainty around crypto's legal status, the likelihood of fraud and contagion present key risks to United States banks.

Crypto-assets and their related activities present key risks to the United States banking system and warrant closer supervision, warns a leading U.S. financial regulator.

For the first time, cryptocurrency was given a dedicated section in the Federal Deposit Insurance Corporation’s annual risk review, calling digital asset risks “novel and complex.”

The Aug. 14 Risk Review 2023 report highlights what the FDIC argues are key risks to banks — and comes after it noticed an increased banking interest in crypto activities.

What are the emerging risks facing the banking system? Today, we published our 2023 Risk Review which takes a comprehensive look at key developments and risks facing banks, including a new section focused on crypto-asset risk. Read more ➡️ https://t.co/Ri442S9ERo. pic.twitter.com/5bY2VHuDof
— FDIC (@FDICgov) August 14, 2023

“The FDIC has been generally aware of the rising interest in crypto-asset-related activities through its normal supervision process,” it wrote.

However, with “significant market volatility in 2022,” more information is needed to understand crypto-related risks, it said.

“Crypto-asset-related activities can pose novel and complex risks to the U.S. banking system that are difficult to fully assess.”

Some of the key risks it identified included the uncertainty about the legal status of cryptocurrencies, the likelihood of fraud and possible contagion and concentration risk due to the interconnectedness of crypto businesses.

The FDIC also said the dynamic nature and rapid innovation of cryptocurrencies increased the difficulty of assessing risk in the space.

Another concern was the run-risk susceptibility of stablecoins which the FDIC said could expose stablecoin holding banks to deposit outflows.

The FDIC’s report follows the March banking crisis, which saw Silicon Valley Bank, Silvergate Bank and Signature Bank all collapse or be forced to close in the space of a week.

All three banks were notable for providing banking services to the U.S. crypto industry. SVB’s closure caused USD Coin (USDC) to depeg from the dollar after its issuer Circle disclosed it could not withdraw $3.3 billion worth of reserves from the bank causing a panic sell-off.

The FDIC and other U.S. regulators stepped in to backstop the banks and sell off their assets to other financial institutions.

Magazine: Unstablecoins: Depegging, bank runs and other risks loom

‘Home’ regulator could solve crypto’s ‘fragmented supervision’ issue: Comptroller

March 7, 2023 Coin Telegraph

banking regulations

During a speech at a banking conference in DC, acting comptroller Michael Hsu said FTX was an example of why a "consolidated home country supervisor" is needed.

Cryptocurrency firms operating multiple entities in different countries should be overseen by one consolidated “home” regulator to stop them from playing "games" aimed at skirting regulators, the acting head of the United States banking regulator has opined.

Michael Hsu, the Acting Head of the Comptroller of the Currency (OCC) made the comments in prepared remarks for the Mar. 6 Institute of International Bankers conference in Washington, D.C.

The OCC is a bureau within the Treasury Department that regulates U.S. banks and aims to ensure the safety of the country's banking system. It has the power to permit or deny banks from engaging in crypto-related activities.

In his speech, Hsu provided “useful lessons for crypto” from traditional banking on how to maintain trust globally.

Good to hear from Acting Comptroller @USOCC Michael Hsu. #IIBAWC2023 pic.twitter.com/SWFGaUC0yv
— IIB (@IIBnews) March 6, 2023

He claimed unless a crypto firm is regulated by one entity, those operating with businesses in multiple jurisdictions will “potentially play shell games” by arbitraging regulations and would subsequently be able to “mask their true risk profiles.”

“To be clear, not all global crypto players will do this. But we won’t be able to know which players are trustworthy and which aren’t until a credible third party, like a consolidated home country supervisor, can meaningfully oversee them.”

“Currently, no crypto platforms are subject to consolidated supervision. Not one,” he added.

The bankruptcy of crypto exchange FTX was used as an example of why the space needed a “home” regulator. Hsu compared the exchange to the equally-defunct Bank of Credit and Commerce International (BCCI) — a global bank that was found to be involved in a litany of financial crimes.

Acting Comptroller of the Currency Michael J. Hsu discusses the failure of the Bank of Credit & Commerce International in 1991 that led to significant changes in how global banks are supervised & its similarities to the crypto exchange FTX. Learn more at https://t.co/HD1T3KHcss pic.twitter.com/7e45zgMbE6
— OCC (@USOCC) March 6, 2023

Hsu said the “fragmented supervision” of both firms meant no one authority or auditor could develop a “consolidated and holistic view” of them as they operated across countries with no framework for information sharing between authorities.

“By seemingly being everywhere and structuring entities in multiple jurisdictions, they were effectively nowhere and were able to evade meaningful regulation.”

In his reasoning for advocating such oversight, Hsu expressed that arguments in the Bitcoin (BTC) whitepaper were “elegant” but crypto “has proven to be extraordinarily messy and complex.”

He added peer-to-peer payments are “virtually nonexistent” and crypto has primarily become an alternative asset class dominated by trading activity that relies on intermediates for it to “operate at any scale.”

“The events of the past year have shown that trust in those intermediaries can be quickly lost, large numbers of individuals can be hurt, and knock-on effects to the traditional financial system can result.”

Hsu said the international bodies that identified the necessity for a “comprehensive global supervisory and regulatory framework for crypto participants” might look to the lessons learned from the BCCI case.

The Financial Stability Board (FSB), the International Monetary Fund (IMF), the International Organization of Securities Commissions (IOSCO) and the Bank for International Settlements (BIS) were the bodies Hsu named in particular.

The FSB, IMF and BIS are currently working on papers and recommendations to establish standards for a global crypto regulatory framework

“Trust is a fragile thing. It is hard to earn, and easy to lose,” Hsu stated.

“Regulatory coordination and supervisory collaboration can help mitigate the risks of losing that trust. We have learned this the hard way in banking. I believe it contains useful lessons for crypto.”

Tether strikes at WSJ over ‘stale allegations’ of faked documents for bank accounts

March 6, 2023 Coin Telegraph

Allegations

Tether has hit back at a Wall Street Journal report detailing alleged shady dealings by it and Bitfinex to open bank accounts.

The company behind stablecoin Tether (USDT) has rebuffed a report by The Wall Street Journal claiming it had ties to entities that faked documents and used shell companies to maintain access to the banking system.

On March 3, the WSJ reported on leaked documents and emails purportedly revealing that entities tied to Tether and its sister cryptocurrency exchange Bitfinex faked sales invoices and transactions and hid behind third parties in order to open bank accounts they otherwise may not have been able to open.

In a March 3 statement, Tether called the findings of the report “stale allegations from long ago” and “wholly inaccurate and misleading,” adding:

“Bitfinex and Tether have world-class compliance programs and adhere to applicable Anti-Money Laundering, Know Your Customer, and Counter-Terrorist Financing legal requirements.”

The firm went on to say that it was a “proud” partner with law enforcement and “routinely and voluntarily” assists authorities in the United States and abroad.

Tether and Bitfinex chief technology officer Paolo Ardoino tweeted on March 3 that the report had “misinformation and inaccuracies” and insinuated that the WSJ reporters were clowns.

I'm at the PlanB anniversary in #lugano
So much energy and people excited to talk about #Bitcoin
While I was on on stage I heard some clown honks, pretty sure was WSJ.
As always ton of misinformation and inaccuracies. Poor guys, must be difficult be them but need better media.
— Paolo Ardoino (@paoloardoino) March 3, 2023

Cointelegraph contacted Tether and Binfinex for comment on the report and their statement but did not receive a response by the time of publication.

WSJ report claims Tether and Bitfinex obscured itself

The WSJ article outlines — through its reported review of leaked emails and documents — Tether and Bitfinex’s apparent dealings to stay connected to banks and other financial institutions that, if cut off from, would be “an existential threat” to their business, according to a lawsuit filed by the pair against Wells Fargo bank.

One of the leaked emails suggests the firm’s China-based intermediaries were attempting to “circumvent the banking system by providing fake sales invoices and contracts for each deposit and withdrawal.”

*Screenshot of headline from Wall Street Journal. Source: Wall Street Journal*

There were also accusations in the report that Tether and Bitfinex used various means to skirt controls that would have restricted them from financial institutions, and had links to a firm that allegedly laundered money for a United States-designated terrorist organization, among others.

Meanwhile, a person familiar with the matter told the WSJ that Tether has been under investigation by the Department of Justice in a probe headed by the U.S. Attorney’s Office for the Southern District of New York. The nature of the investigation could not be determined.

Tether has faced multiple allegations of wrongdoing over the past few months and recently had to downplay a separate WSJ report in early February that claimed four men controlled approximately 86% of the firm since 2018.

It similarly had to combat what it called “FUD” (fear, uncertainty, and doubt) from a WSJ report last December concerning its secured loans and subsequently pledged to stop lending funds from its reserves.

crypto banking