Crypto horse bolted well before US regulators’ warning shot, analysts say

Crypto horse bolted well before US regulators’ warning shot, analysts say

Crypto analysts warned that US regulators may be trying to “shut the stable door after the horse has bolted” today after the US central bank and financial watchdogs sounded the alarm over the risks that cryptocurrencies could pose to mainstream lenders.

The Federal Reserve, alongside the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, last night issued a warning to US banks over the spread of crypto turbulence into the traditional financial system.

The three bodies said it was integral that risks related to the crypto-asset sector “do not migrate to the banking system” and warned that they were now “carefully reviewing any  proposals from banking organizations to engage in activities that involve crypto-assets”.

“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 watchdogs warned.

However, analysts at AJ Bell warned today that while the statement marked a “significant public intervention”, the warnings to banks were behind the curve and come after the industry has already been rocked by a string of high profile bankruptcies and the spectacular implosion of Sam Bankman-Fried’s exchange FTX in November.

“Following the FTX scandal, it seems unthinkable that any big banks wouldn’t recognise the risk of exposing themselves to crypto-assets, so the Fed’s warning looks a little like shutting the stable door after the horse has bolted,” said Laith Khalaf, head of investment analysis at trading firm AJ Bell.

Khalaf added that while banks “shouldn’t be complacent”, their exposure to systemic risks from crypto is “relatively limited”. 

“A report published by the Bank for International Settlements in 2022 found that crypto made up only around 0.01 per cent of total banking exposures,” he said.

However, the warnings are likely to send a chill through crypto firms and investors as regulators tighten the screws this year and look to bring in guardrails around the largely unregulated sector.

Bank of England officials have warned of the potential for crypto risks to spread into the traditional financial system if the market continues to grow unchecked by regulation.

“Financial institutions and investors should take an especially cautious and prudent approach to any adoption of these assets until the necessary regulatory regimes are in place,” the Bank warned in its most recent financial stability report.

Market shock

Crypto markets were rocked last year as investors scrambled for safer ground amid soaring inflation and a cost of living crunch. 

The overall value of the market has shrunk from $2.8 trillion around a year ago to $820bn today. 

Khalaf said today that the scale of the downturn last year would have already exposed any major “crypto sink holes in mainstream financial institutions”.

Regulators on both sides of the Atlantic have been scrambling to draw up firmer regulatory frameworks to police crypto firms and the forays of mainstream financial institutions into the market.

Sara de la Torre, financial services chief at IT security firm NCC, told City A.M. today the push from the watchdogs sent a signal to the sector.

“What’s also interesting is that this is the first joint announcement from US regulators,” she said.

“It signals that governing bodies are increasingly keen to take a more proactive, concerted effort when it comes to regulating this evolving, turbulent market.”