Wanted: A Prudential Framework for Crypto-Assets

16 Pages Posted: 19 Jan 2023

See all articles by Lee Reiners

Lee Reiners

Duke Financial Economics Center; Duke University School of Law

Sangita Gazi

The University of Hong Kong - Faculty of Law; Yale Law School; Fintech and Blockchain Program

Date Written: January 17, 2023


The collapse of cryptocurrency exchange FTX in November 2022 is the most significant moment in cryptocurrency history. While many commentors referred to FTX’s failure as “crypto’s Lehman moment,” the fallout was largely contained within the cryptocurrency ecosystem and there was minimal spillover into the traditional financial system. Limited interconnections between the crypto ecosystem and the traditional financial system is the principal reason FTX’s fallout was limited. This outcome is partially due to coordinated actions of federal bank regulators who each had outstanding guidance in place at the time of FTX’s failure expressing concerns over banks’ ability to engage in crypto-asset activities in a safe and sound manner and requiring banks to notify their appropriate regulator before engaging in such activity. While the banking agencies have wide latitude to prohibit any activity they consider incapable of being conducted in a safe and sound manner, it would be difficult to argue that all crypto-asset activities threaten safety and soundness. The question then is: where should bank regulators draw the line? This paper summarized the limited publicly available data on banks’ exposure to crypto-asset activities and offers several specific examples of how U.S. banks engage in crypto-asset activity. It then examines past guidance issued by U.S. bank regulators and explains why this guidance lacks sufficient detail to clarify the prudential requirements associated with the various crypto-related activities banks are engaged in. The article then assesses the adequacy of the Basel Committee on Banking Supervision’s final prudential standard for crypto-asset exposures, issued in December 2022, and finds that the standard fails to adequately address the unique risks various crypto-asset activities pose to banks. We conclude by offering recommendations U.S. bank regulators can quickly implement to dimension the scale of banks’ crypto-asset exposure and mitigate the associated risks.

Keywords: prudential regulation, cryptocurrency, banking law

JEL Classification: G01, G21, G28, K23

Suggested Citation

Reiners, Lee and Gazi, Sangita, Wanted: A Prudential Framework for Crypto-Assets (January 17, 2023). Arkansas Law Review, Forthcoming, Duke Law School Public Law & Legal Theory Series No. 2023-11, University of Hong Kong Faculty of Law Research Paper No. 2023/07, Available at SSRN: https://ssrn.com/abstract=4327091 or http://dx.doi.org/10.2139/ssrn.4327091

Lee Reiners (Contact Author)

Duke Financial Economics Center ( email )

213 Social Sciences
419 Chapel Drive
Durham, NC 27708
United States
9196601800 (Phone)

HOME PAGE: http://https://econ.duke.edu/dfe

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Sangita Gazi

The University of Hong Kong - Faculty of Law ( email )

Pokfulam Road
Hong Kong, Hong Kong

Yale Law School ( email )

127 Wall Street
New Haven, CT 06510
United States

Fintech and Blockchain Program ( email )

Newark, NJ
United States

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