The Office of the Comptroller of the Currency (OCC) said digital assets could enhance the functionality of financial services, but warned banks about the risks.
The OCC has published a ‘Semiannual Risk Report’ that analyzes how cryptocurrencies can interact with the banking sector.
Distributed ledger technology and digital assets, including stable coins, could enhance the functionality of financial services, according to the report.
OCC said that its approach to crypto is very careful, and banks and other regulated institutions should consult with OCC before they start offering any services in the cryptocurrency sector. These services may include storage, offering derivative products, and access to third-party cryptocurrency products.
“The OCC is approaching crypto-related activities in the federal banking system very carefully with a high degree of caution and expects its supervised institutions to do the same. OCC supervised institutions should reach out to the appropriate OCC supervisory office before engaging in the crypto-related activity.”
According to OCC, the use of cryptocurrencies needs a sufficient level of knowledge and experience in relation to the main products, services, and processes to identify and address strategic, operational, regulatory, and reputational risks.
“While crypto-asset-based products and services can create opportunities for banks and their customers, they can also carry significant risks. Banks should conduct due diligence and risk management, which includes ensuring sufficient knowledge and expertise in the underlying products and services and processes to identify and address strategic, operational compliance, and reputational risks. Sound risk management of crypto-related product offerings includes alignment with a bank’s strategic goals, risk appetite, resources, and expertise.”
The OCC warns that while cryptocurrencies can open up opportunities for the banking sector, it is important to understand the risks associated with this new asset class.
“The adoption of innovative technologies to facilitate financial services can offer many benefits to both banks and their customers. However, innovation may present risks. As such, risk management inclusive of due diligence and change management is important for fulfilling responsible innovation strategies and successfully adopting technology.”
In 2022, the OCC intends to provide banks with additional guidance on how exactly they can engage in cryptocurrency activities.
“In 2022 OCC plan to provide greater clarity on whether certain activities related to crypto-assets conducted by banks are legally permissible and to provide expectations for safety and soundness, consumer protection, and compliance with existing laws and regulations. The agencies’ work will focus on crypto-asset custody services, facilitation of customer purchases and sales of crypto-assets, loans collateralized by crypto-assets, issuance and distribution of stable coins, and activities involving the holding of crypto-assets on the balance sheet.”
Recall that in November, the OCC clarified how the cryptocurrency activities of national banks and federal savings associations in the United States will be regulated. In addition, at the beginning of last month, the OCC advocated tightening the laws about stable coins.
In September, OCC director Michael Hsu said the Defi industry could trigger an economic meltdown similar to the 2008 international financial crisis.