Despite growing interest in the crypto sector from mainstream financial firms, participation in the space is likely to be limited by a lack of regulation, says Fitch Ratings.
In a new report, the rating agency noted that BNY Mellon recently became the first major U.S. bank to provide custody of certain cryptoassets (Bitcoin and Ether) alongside traditional assets.
However, even as customer interest in crypto grows and potential business opportunities for banks emerge, increasing involvement in the cryptoasset sector by mainstream banks is likely to be limited by the lack of a federal regulatory framework, it said.
“Banks will likely tread cautiously until there is a comprehensive and ideally globally coordinated regulatory framework given heightened fraud risk, cybersecurity concerns and operational risks,” Fitch said.
The report noted that traditional risks — such as market, regulatory, liquidity and counterparty risks — apply equally to the crypto sector and are heightened by its extreme price volatility.
“Although federal regulatory agencies have yet to coordinate and establish a robust framework for institutions operating in the digital asset ecosystem, market risks to be addressed by regulation include correlation risks and hedge effectiveness, and risks from overleveraged transactions that can amplify losses across the ecosystem,” the report said.
It noted that regulators are also focused on basic investor protections and disclosures, “given the pervasiveness of fraud and potential for market manipulation in light of recent digital asset failures and bankruptcies.”
An array of other legal and accounting issues need to be resolved too, Fitch said.
While certain agencies, such as New York’s Department of Financial Services have spearheaded the development of regulations for certain aspects of the crypto sector, an overarching federal framework isn’t imminent, it said.
“A comprehensive legislative framework for digital assets at the federal level will likely need to be initiated through Congress, which is not likely to occur until after the mid-term elections,” it noted.