New York State regulators have issued new guidance for banks looking to get involved in digital currencies, while several federal agencies have intensified their warnings about the risks banks face if they dabble in crypto.
The New York State Department of Financial Services last month issued rules requiring banks to seek the department’s approval before offering any new services related to digital currencies. This includes services offered by third-party providers in partnership with a bank. Banks must submit a business plan, risk management assessment, details about consumer protection and other information to be considered for approval.
DFS Superintendent Adrienne A. Harris said in a statement that the new guidance is “critical to ensuring that consumers’ hard-earned money is protected, that New York regulated banking organizations remain resilient and competitive, and that the expectations are clear for those that wish to submit proposals for virtual currency-related activity.”
In Western New York, banks’ cryptocurrency offerings have been sparse.
Five Star Bank in late 2021 announced its plan to offer cryptocurrency investing to customers in partnership with Bitcoin provider NYDIG. That initiative never launched, in part due to uncertain regulations, according to Sean Willett, chief administrative officer for the bank.
An existing practice known as “finder’s authority” allows banks to refer customers to third-party providers for many financial services, but it’s unclear if this applies to crypto providers. The new state regulations don’t answer that question, Willett said.
“A key question, among others, remains whether it is legally permissible for banks to refer customers to NYDIG under current definition of finder’s authority,” he said via email.
He also hopes for more regulatory clarity on what consumer protections should be in place for cryptocurrencies, which are extremely volatile investments.
Meanwhile, the Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency last week issued a joint statement warning banks about the risks inherent in the crypto industry.
While the statement does not prohibit banks from providing crypto services to customers, it says that many such services are “highly likely to be inconsistent with safe and sound banking practices.”
It lists high risk of fraud, legal uncertainties, lack of oversight and high volatility among the key risks that banks should consider.
The price of Bitcoin and other leading cryptocurrencies fell dramatically in 2022, driven in part by the collapse of the TerraUSD coin and the bankruptcy of high-profile cryptocurrency exchange FTX. Bitcoin is now trading at about $17,000 a coin, down from a peak of around $65,000 in late 2021.
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