US regulators have issued their first joint warning to banks about the risks associated with the cryptocurrency market.
The watchdogs urged financial institutions to beware of potential fraud, legal uncertainty and misleading disclosures by digital asset companies.
Banks were also warned about the sector’s “contagion risk”.
It comes just two months after the collapse of trading platform FTX sent shockwaves through the crypto industry.
In the joint statement, the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency said they closely monitor crypto activities by banking organizations.
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“The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector,” the statement said.
Regulators also said that issuance or holding of crypto tokens stored on public, decentralized networks “is most likely inconsistent with safe and sound banking practices.”
Banks have also been encouraged to take steps to prevent problems in the digital asset market from spreading to the broader financial system.
“It is important that risks associated with the crypto-asset sector that cannot be mitigated or controlled do not migrate into the banking system,” she added.
Tuesday’s statement comes after months of hesitation by U.S. financial industry regulators to issue unified guidelines for cryptocurrencies, although banks are seeking clearer advice from regulators.
The cryptocurrency industry was rocked by FTX’s collapse in November.
It was the second largest cryptocurrency exchange in the world and the entry point for millions of people into the digital asset market.
On Tuesday, Sam Bankman-Fried, former CEO of FTX, officially denied allegations of defrauding clients and investors.
He pleaded not guilty in a US court to allegations that he accepted client deposits at FTX to fund his other firm, Alameda Research, to buy real estate and make political contributions.
Two of Mr. Bankman-Fried’s closest colleagues have already pleaded guilty and are cooperating in the investigation that has rocked the entire cryptocurrency industry.
Mr. Bankman-Fried was one of the highest profile figures in the industry, known for his political connections, celebrity endorsements and bailouts of other struggling companies.
He has been accused by the US of “building a house of cards on a basis of deception while telling investors it is one of the most secure buildings in crypto”.
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