OCC Says Banks Should Remain Wary of Crypto Activities

Crypto assets are an emerging risk facing banks, a regulatory agency says.

The Office of the Comptroller of the Currency (OCC) highlighted crypto-assets as a “special topic” in its “Semiannual Risk Perspective for Fall 2022,” which was released Thursday (Dec. 8).

“This year’s dislocations in crypto markets and the associated failures of crypto firms have highlighted several key risks, which reinforce for banks and supervisors the importance of taking a careful and cautious approach to crypto activities and engagement with crypto-related firms,” OCC said in the report.

For one thing, risk management practices in the crypto industry are not mature. The industry has been plagued by hacks, outages, fraud, scams and confusion over ownership rights, custody arrangements and financial representations, the report 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,” OCC said.

In addition, “stablecoins may be unstable,” the report said. It added that the potential for run risk with stablecoins was demonstrated by the collapse of an algorithmic stablecoin in the spring, which also affected asset-backed stablecoins, and that most stablecoins remain vulnerable to run risk.

The report also said there is a high risk of contagion in the crypto industry. With a high degree of interconnectedness between certain crypto participants, there’s a high risk of contagion among the connected parties.

“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,” OCC said in the report.

The release of the report comes about a month after Acting Comptroller of the Currency Michael J. Hsu said in a speech that OCC’s “careful and cautious” strategy for crypto activities by banks had mitigated the risk of contagion from this year’s events in the crypto markets.