AJ Bell press comment – 4 January 2023
Laith Khalaf, head of investment analysis at AJ Bell, comments on the latest joint statement by US regulators warning on banking exposure to cryptocurrency:
“There’s an old saying in stock markets that you shouldn’t fight the Fed, but that now seems precisely what downtrodden crypto investors will need to do as the US central bank heads up a triumvirate of regulators warning banks over the risks of crypto exposure. The list of risks highlighted to banks leads like a rap sheet for the less salubrious end of the crypto industry, encompassing fraud, misleading disclosures, and a lack of robust governance practices.
“This is a significant public intervention and a clear shot across the boughs for both the banking and crypto industries, which shows how concerned regulators are about crypto risks spilling over into mainstream financial institutions. Those who remember how a downturn in the US housing market led to the collapse of Lehman Brothers may well be wondering if crypto is the new version of the disreputable mortgage-backed security, a complex financial product which permeated the banking industry and helped to foment the global financial crisis.
“We shouldn’t be complacent when it comes to systemic risks to the banking industry, but the reality is that banks’ exposure to crypto is relatively limited. A report published by the Bank for International Settlements in 2022 found that crypto made up only around 0.01% of total banking exposures. There are a number of ways in which banks may have exposure to crypto. Probably the riskiest are direct holdings in crypto assets and loans to crypto companies, but these in turn only made up 4.2% of total crypto exposures. Clearly there are profound risks associated with crypto investing and the crypto industry, but the banking system appears to have little exposure at present. Indeed, seeing as the market cap of crypto has shrunk from $2.8 trillion a little over a year ago to $820 billion today, one would already have expected any crypto sink holes in mainstream financial institutions to have already made themselves known (market cap data from CoinMarketCap).
“Following the FTX scandal, it seems unthinkable that any big banks wouldn’t recognise the risk of exposing themselves to cryptoassets, so the Fed’s warning looks a little like shutting the stable door after the horse has bolted. But it’s more than that. The statement from US regulators draws a line in the sand and heavily discourages banks from getting any further into bed with the crypto industry, at least in terms of holding or issuing crypto assets. This regulatory warning is positive for the resilience of the banking sector, but it’s another chill wind for the crypto industry.”
