With Congress scheduled to hold two hearings on the FTX implosion next week, Warren’s letter signals growing concern about how volatile digital assets could be integrated into traditional financial markets through new laws or regulations. Warren, one of Washington’s most vocal crypto skeptics, has repeatedly warned against legislation that could give crypto companies leeway to circumvent rules that apply to stock exchanges, banks and brokerage firms.
“The FTX collapse revealed close ties between the banks and the suspected crypto companies,” Warren said in a statement. “Banking regulators must ensure that the highly volatile and risky crypto market does not endanger the banking system and potentially harm millions of Americans.”
Digital assets largely operate in a legal gray area that has kept them separate from the Wall Street institutions that drive the markets. For the most part, that spared banks from a market contagion that rocked cryptocurrency businesses after FTX filed for bankruptcy last month, something Biden administration officials have also noted.
“The good thing about an explosion like the one we saw is that it hasn’t spilled over into the banking sector,” Treasury Secretary Janet Yellen said in a New York Times conference last week. “Banking regulators have been very careful with cryptocurrencies.”
Still, FTX and related hedge fund Alameda Research, along with other cryptocurrency startups, began forging ties with a handful of small and midsize banks in recent years, raising fears that the industry “may have ties.” closer to the banking system than previously believed. Warren wrote.
FTX had more than $1 billion stashed away at Silvergate Capital, representing just under 10 percent of the bank’s deposits from digital asset providers. The La Jolla, California-based bank also counts other major crypto institutions among its clients, including several that have relied on your exchange network to settle payments in dollars and euros overnight. Silvergate recently revealed that now-bankrupt lending platform BlockFi had $20 million on deposit.
Meanwhile, Alameda invested more than $11 million in Farmington State Bank earlier this year in an effort to transform the institution, since renamed Moonstone Bank: in a financial hub for cryptocurrency and cannabis businesses.
Federal banking regulators have warned financial institutions to tread carefully before partnering with cryptocurrency startups.
After slapping the late crypto lender Voyager Digital with a cease and desist order for allegedly By making false and misleading statements about its customers’ deposits secured through accounts with Metropolitan Commercial Bank, the FDIC issued guidance urging banks to “confirm and monitor” their other digital startups to prevent similar claims.
Earlier this year, the Fed ordered banks to notify their regulators before engaging in any new activity involving crypto startups or digital asset markets.