US regulators have issued their first-ever joint warning to banks about the risks associated with the cryptocurrency market.
Oversight bodies have asked financial institutions to be wary of potential fraud, legal misinformation and misleading statements by digital asset companies.
This comes just two months after the collapse of the FTX trading platform, which sent shock waves through the cryptocurrency industry.
In the joint statement, the US central bank, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency said they closely monitor the crypto activities of banking organizations.
“The events of the past year were marked by significant volatility and exposure of vulnerabilities in the crypto-asset sector,” the statement said.
The regulators have also said that issuing or holding cryptocurrencies, which are stored on public decentralized networks, is “highly likely to be inconsistent with safe and sound banking practices”.
The regulators also urged banks to take steps to avoid problems in the digital asset market spreading to the broader financial system.
“It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled are not transmitted to the banking system,” they added.
Tuesday’s statement comes after months of reluctance by US financial industry watchdogs to issue uniform guidance on cryptocurrencies, despite banks calling for clearer advice from regulators.
FTX shock
The cryptocurrency industry was affected by the collapse of the FTX exchange in November.
FTX was the second largest cryptocurrency exchange in the world and the entry point for millions of people into the digital asset market.
And on Tuesday, former FTX CEO Sam Bankman-Fried officially denied accusations that he defrauded clients and investors.
He pleaded not guilty in a US court against allegations that he took customer deposits at FTX to fund his other company, Alameda Research, to purchase property and to make political donations.
Two of Bankman Fried’s closest associates have already pleaded guilty and are cooperating with the investigation, which has rocked the entire cryptocurrency industry.
Bankman Fried is one of the most prominent figures in the sector, and is known for his political connections, celebrity endorsements, and bailouts for other troubled companies.
The US has accused him of building a “house of cards on a foundation of deception, while telling investors that it is one of the safest buildings in cryptocurrency.”