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Fed, FDIC and OCC warn banks of crypto contagion, with laundry list of sordid things inherent in crypto scene

Only a few smaller banks have significant exposure to cryptocurrencies, and their shares have plummeted.

By Wolf Richter for WOLF STREET.

After a series of bankruptcies of cryptocurrency companies, and after the outright collapse of some stablecoins, and after the general collapse of cryptocurrency prices, and after revelations of all kinds of shenanigans, scams and fraud imaginable and previously unimaginable across the crypto and DeFi space, US banking regulators today issued a warning to banks in the crypto and DeFi space, amid fears of contagion to the banking industry.

Up until now, cryptography has been like a giant video game where nothing is really illegal because it’s just a video game, and where players have a lot of fun clicking buttons and watching screens flashing while cheating and defrauding each other, a video game where people in the end lose all your money if you don’t get out on time. And it’s not a big deal because it’s just a video game, with no real consequences on the economy, other than a huge waste of energy, because there’s nothing really needed for cryptography outside of the video game.

But contagion spreading from the beloved and fun crypto video game to the sleazy fractional reserve fiat banking system can be a real mess.

Therefore, the Federal Reserve, the FDIC and the Office of the Controller of the Currency (OCC) – the three banking regulators in the US – issued a joint warning today to banks, with a list of “key risks” associated with cryptocurrencies – in effect, enumerating the sordid things that are standard practice in the cryptocurrency market. and why banks need to protect themselves.

This is the full list of things happening in the crypto video game that banks “should be aware of,” quoted verbatim from their joint statement:

  • Risk of fraud and scams among crypto industry players.
  • Legal uncertainties relating to custody practices, redemptions and property rights, some of which are currently the subject of legal proceedings and proceedings.
  • Inaccurate or misleading representations and disclosures by cryptocurrency companies, including misrepresentations about federal deposit insurance and other practices that may be unfair, misleading or abusive, contributing to significant harm to retail and institutional investors, customers and counterparties [for example, now-bankrupt Voyager was advertising that customer deposits were covered by the FDIC!]
  • Significant volatility in crypto asset markets, the effects of which include potential impacts on deposit flows associated with crypto asset companies.
  • Susceptibility of stablecoins to risk-taking, creating potential deposit outflows for banking organizations holding stablecoin reserves [remember stablecoin Terra Luna, which collapsed to nothing in no time when there was a run on the stablecoin].
  • Contagion risk in the crypto-asset industry resulting from interconnections between certain crypto-asset participants, including through opaque loans, investments, financing, services and operating agreements. These interconnections can also present concentration risks for banking organizations with exposures to the crypto asset sector.
  • Risk management and governance practices in the crypto industry lacking in maturity and robustness.
  • Increased risks associated with open, public and/or decentralized networks, or similar systems, including, but not limited to, lack of governance mechanisms that establish oversight of the system; the absence of contracts or standards to clearly establish roles, responsibilities and responsibilities; and vulnerabilities related to cyberattacks, outages, lost or locked assets, and illicit funding.

And the joint statement added that “issuing or holding as primary crypto-assets that are issued, stored or transferred on an open, public and/or decentralized network, or similar system, is highly likely to be inconsistent with sound and safe banking practices. .”

And the statement said that banking regulators “have significant security and soundness concerns with business models focused on crypto-related activities or have focused exposures to the crypto-asset sector.”

I get the message that it’s okay for video game players to lose all their money on these things; but that it is not right for banks to lose all their money on these things.

No major US bank achieved life-threatening exposure to cryptocurrency, but a few small banks made a video game-like effort to become a major bank in short order, and their stocks soared while what I call the consensus hallucination still reigned as the Fed money. print was turning investors’ brains to mush.

But since November 2021, the Fed has been talking about, and then starting to do, some real tightening, and the party is over, and cryptos crash, and everything around them crashes, and the banks that deal in cryptos, their stocks too They fell. Here are the main two:

capital of silvergate [SI], which had gone public through a classic IPO in November 2019, became a poster child for the principle of consensual hallucination. It owns Silvergate Bank, “the leading provider of innovative financial infrastructure solutions and services to participants in the nascent and expanding digital currency industry,” she said at the time.

Their shares started to skyrocket in October 2020 from around $15 and a year later in November 2021 they multiplied by a factor of 15 to $220. a hero in my pantheon of stocks imploded and today closed at $17.27, down 92.8% from their November 2021 high:

subscription bank [SBNY] made a genius move on Wall Street. It was just a small bank until it tied its fortune to cryptocurrencies, and its shares soared from around $120 per share at the end of 2019 to $374 on Jan. 18, 2022. On the same day that its shares peaked, he sold another 2.1 million shares at $352 each, extracting $739 million from people who bought those shares in a final paroxysm of consensual hallucination. Those folks were instantly crushed, and at today’s closing price of $113.17, they’re down 68.9% in ten months. The crypto hype just keeps on giving.

Since the intraday peak of Jan. 18th, the stock is down 69.8% and there’s a place for it in my pantheon of imploded stocks (minimum requirement: -70% from peak):

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