Recent warnings by U.S. banking regulators about the risks of cryptoassets are both a positive for banks and a negative for crypto adoption and development by the mainstream financial industry, says Moody’s Investors Service.
Last week, a trio of U.S. regulators — the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency — issued a joint statement on the risks of cryptoassets to the banking sector.
The statement warned that banks holding crypto would be “highly likely to be inconsistent with safe and sound banking practices.”
“The statement, notable for its bluntness, comes after a sharp drop in cryptoasset valuations over the past year and several negative crypto market events, including massive investor losses from fraud at a once-leading centralized cryptocurrency institution,” a report from Moody’s said.
The rating agency said the warning, which echoed similar recent cautionary guidance from other global regulators, represents a positive for banks because it signals regulators’ “heightened vigilance, which will encourage caution among banks, foster a more stable operating environment and reduce principal risks to banks from a highly volatile and operationally complex asset class and ecosystem.”
Alongside the intensified regulatory scrutiny, the decline in crypto valuations and the damage to the sector’s reputation will also likely lead to reduced capital spending and investment in the sector, it noted.
“The regulators’ stance is likely to slow the pace of development of the crypto industry and capital investment into cryptoassets by both traditional banks and venture capital firms,” it said.
At the same time, Moody’s said the chill in the crypto sector could allow it to develop at a slower, more sustainable pace — more likely with government involvement.
“Notwithstanding recent failures in crypto, governments continue to pursue ways to improve and streamline payments and to update money for today’s digital age,” it said.
“[The] U.S. agencies’ cautious approach to cryptoassets increases the likelihood that should the U.S. money and payments system evolve, it will more likely take the form of a state solution implemented alongside or integrated with the current banking system, rather than as a private cryptocurrency solution,” the report concluded.