US Watchdog Says Banks Shying Away From Stumbling Crypto Industry

U.S. banks have been cooling in their crypto interest since this year’s twin failing of Terra (and its currency, LUNA) and FTX, said Michael Hsu, the acting chief of the Office of the Comptroller of the Currency (OCC).

“Overall, I can say – and this is going to be obvious – is that there was more interest before Terra/LUNA and FTX than since Terra/LUNA and FTX,” said Hsu, whose banking agency released its "Semiannual Risk Perspective" report Thursday, in which cryptocurrency risks were given heightened prominence.

The report included a new section on digital assets as a “special topic in emerging risk,” and it pummeled the industry, saying its risk management practices “lack maturity.”

“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,” noted the report, which is issued twice a year to flag risks to banking in the U.S.

According to OCC guidance, national banks overseen by the agency – representing the vast bulk of significant U.S. lenders – aren’t allowed to dive into new crypto business without getting an OK from the agency that they’re doing it in a safe way. So far, most crypto activity at banks has centered on holding digital assets for customers, though some Wall Street firms have experimented with stablecoins and other uses for blockchain technology.

This year’s events – culminating recently with the implosion of one of the global crypto giants, FTX – “have revealed that the crypto industry risk management practices are weak, that stablecoins may not be stable, and that contagion risk within the crypto industry is high,” said Hsu, who has been steadily critical of the sector. Combining all of that, he said, “explains some of the banks’ postures towards crypto.”

U.S. Senators Elizabeth Warren (D-Mass.) and Tina Smith (DFL-Minn.) sent letters to banking regulators this week, asking Hsu, Federal Reserve Chair Jerome Powell and Acting Federal Deposit Insurance Corp. Chair Martin Gruenberg for answers about banks’ involvement in crypto.

“While the banking system has so far been relatively unscathed by the latest crypto crash, FTX’s collapse shows that crypto may be more integrated into the banking system than regulators are aware,” the lawmakers argued in the letters.

In particular, the lawmakers asked Hsu how Alameda Research, a company founded by FTX creator Sam Bankman-Fried, could have invested in Moonstone Bank, a financial institution based in Washington state.