(Kitco News) - The U.S. Office of the Comptroller of the Currency (OCC) has released its latest report on the key issues facing the federal banking system, and crypto-assets were one of the main areas of risk highlighted by the banking industry regulator.
“The OCC continues to approach crypto-asset products, services, and activities cautiously for a variety of reasons,” the report said. “These include high volatility among crypto-assets, high-risk lending and leverage within crypto-asset markets, high interconnectedness and concentration within the crypto industry, and a lack of consistent or comprehensive regulation for certain crypto-asset entities.”
Following a tumultuous year in the crypto market, with the downfall of Terra/Luna and FTX still reverberating throughout the ecosystem, the OCC has recommended that banks take a careful and cautious approach to crypto activities and limit their engagement with crypto-related firms.
“Crypto industry risk management practices lack maturity,” the OCC said. “Most crypto market participants appear unprepared for the stresses and surprises that have taken place this year, resulting in substantial losses for millions of consumers.”
The banking regulator went on to note that while the industry is in the process of developing its risk management and governance practices, they are not yet robust and lack the scalability and efficiencies required to protect the public.
“Hacks and outages are frequent, and fraud and scams remain high throughout the industry. In some cases, ownership rights, custody arrangements, and financial representations have created a high degree of confusion,” the regulator added.
Another area of concern highlighted by the OCC is stablecoins, which “may be unstable.” The report pointed to the collapse of Terra’s TerraUSD Classic (USTC) stablecoin earlier in 2022 which kicked off the first contagion wave across the crypto ecosystem.
“The collapse of an algorithmic stablecoin in the spring revealed the potential for run risk with stablecoins. The collapse affected not only algorithmic stablecoins but also asset-backed stablecoins, with some losing their pegs for periods of time,” the report noted. “While stablecoin reserve practices have incrementally evolved since then, most stablecoins remain susceptible to run risk.”
A third risk mentioned by the OCC is the contagion risk, which is “high within the crypto industry.” The events of 2022 put a spotlight on the high degree of interconnectedness between some crypto firms, which have employed a variety of unclear lending and investing arrangements.
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Firms like FTX, Three Arrows Capital and Celsius have shown a pattern of leveraged trading and poor risk management that has resulted in lost customer funds and bankruptcy, the report noted. This has led to an increased risk of contagion among connected parties.
These risks have led the OCC to recommend a careful and cautious approach to crypto-assets in the federal banking system. It wants to ensure that banks are engaging the sector in a “safe, sound and fair manner,” and it will continue to work with other federal and state agencies to research and assess certain crypto-asset activities.
“OCC-supervised institutions considering these activities should take a careful and incremental approach to ensure appropriate controls and risk management practices are in place before scaling or engaging in additional activities,” the report said. “National banks and federal savings associations interested in engaging in crypto-asset activities should discuss the activities with their supervisory office before engaging,” as some activities may require permission.
