The last few years had started to see a convergence between crypto and banking, with bitcoin appearing to rapidly grow mainstream. That momentum hit a wall with the spectacular crypto market failures of 2022, including the collapse of the crypto exchange FTX. In response to the significant volatility and exposure of vulnerabilities in the crypto sector that resulted, the federal prudential bank regulators (Board of Governors of the Federal Reserve System (Fed), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC)) have recently taken firmer, coordinated moves to delineate the types of risks related to the crypto sector that banks should be aware of and, in certain instances, that do not belong in the banking system at all, in their view.
The policy lines being drawn are critical because banks continue play a dominant role in mainstream, day-to-day financial activities. A bank’s expansion into crypto activities or offerings underpinned by distributed ledger technology (DLT),…