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Federal regulators warn banks on crypto: Be careful

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A cryptocurrency reads "Turn Cash Into Crypto" with a graphic of a $20 bill and the logos for several seven major cryptocurrencies, including bitcoin.

Although the Federal Reserve and other agencies are not imposing new regulations on cryptocurrency, their joint statement highlights liquidity risks. Stefani Reynolds/AFP via Getty Images

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Since the cryptocurrency exchange FTX collapsed late last year, calls for regulation of the industry have been getting much louder.

Congress has talked about it a lot, but in its current state of division, legislation isn’t likely. That leaves sorting out what to do to federal regulatory agencies.

On Thursday, three of them got together and put out a statement warning banks to be careful about adding too much cryptocurrency to their balance sheets. This is the second statement on crypto in as many months from the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

“The bank regulators are focused on the interconnections between crypto and traditional banks,” said Timothy Massad, director of the Digital Assets Policy Project at Harvard and former chair of the Commodity Futures Trading Commission. “And they have wanted to limit those so as to protect the traditional banking system.”

Those limits are the reason regulators believe the FTX fiasco didn’t cause more damage to the economy, he said.

Now, the agencies are highlighting liquidity risks when it comes to crypto. But none of this is technically new regulation of crypto, according to Ananya Kumar, who tracks cryptocurrency regulation globally at the Atlantic Council.

“So the way that these agencies are engaging in this is through their supervisory capacity as regulators of traditional financial institutions, not as regulators of crypto,” she said.

It’s unclear just who can regulate the crypto industry. The Securities and Exchange Commission? The Commodity Futures Trading Commission?

“When we talk about some of the other agencies, namely the SEC and the CFTC, in this space, we know that there’s an ongoing turf war,” Kumar said.

Banking regulators don’t have that problem, said Jarrod Loadholt, who works on crypto issues at the law firm Ice Miller.

“There are very clearly defined lines of who does what between the FDIC, the OCC and the Federal Reserve,” he said.

They aren’t saying banks can’t or shouldn’t get into crypto, but they are saying, in unison, what many experts have been telling consumers: Just be careful.

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