Crypto Markets In 2023: A Rocky Past Drives Future Clarity

2022 was a difficult year for all markets --but it was especially difficult for the cryptocurrency market. We don't have a crystal ball but there is existing data to show the likely path forward.

Looking forward to 2023, we expect to see significant regulatory clarity, policy guidance and in some cases enforcement action activities from state-based and federal finance regulators. During the first week of January, the Federal Reserve, the OCC, and the FDIC issued rare joint guidance warning against the downstream risks cryptocurrency poses to the traditional banking system. The guidance was shared with the CEOs of all National Banks, Federal Savings Associations, and Federal Branches and Agencies; Department and Division Heads in addition to Examination Staff and other parties.

Here are some highlights from the statement below:

• Highlights eight key risks associated with crypto-assets that could affect banks.

• Reminds banks to engage in robust supervisory discussions with their supervisory office regarding proposed and existing crypto-asset-related activities.

• Reminds banks that, before launching crypto-asset-related activities, banks should ensure that an activity can be performed in a safe and sound manner, is legally permissible, complies with applicable laws and regulations, and can be conducted in a manner that is fair to consumers.

• Confirms the intent for future inter-agency coordination on crypto-related issues.

Find the full statement here.

This is indicative of a not-so-surprising shift. Back in May 2022, speaking to the House Financial Services Committee, Treasury Secretary Yellen said,

“I wouldn’t characterize it at this scale as a real threat to financial stability, but they’re growing very rapidly, and they present the same kind of risks that we have known for centuries in connection with bank runs.”

The statement above was made following the Terra Luna failure. But even at the end of November (which was following the FTX collapse), Treasury Secretary, Chair Yellen shared this statement with DealBook.

"The good piece of an explosion like we saw is that it hasn't spilled over to the banking sector. Banking regulators have been very careful about crypto," she said.

We believe actions speak louder than words and this joint interagency guidance appears to indicate a new view --- that the cryptocurrency markets do have the potential to negatively impact the traditional markets. Only time and additional guidance will tell us if we are correct. We expect these coordinated guidance activities to continue throughout 2023 as the regulatory community works to develop and share more policies on cryptocurrency.