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US regulators have warned banks to be on their guard against the risks posed by exposure to the crypto asset sector in the wake of the implosion of crypto-exchange FTX and heightened volatility in the market.

The Federal Reserve, Federal Deposit Insurance Corp (FDIC) and the Office of the Comptroller of the Currency say they are stepping up their oversight of banks with business interests in crypto asstes and carefully scrutinizing any proposals from banks to engage with the crypto sector amid fears of contagion risks.

Banks issuing or holding crypto tokens stored on public, decentralized networks are "highly likely" to be inconsistent with safe and sound banking practices, the regulators added.

In a statement, the agencies say: "Given the significant risks highlighted by recent failures of several large crypto-asset companies, the agencies continue to take a careful and cautious approach related to current or proposed crypto-asset-related activities and exposures at each banking organization."

In December, the New York Department of Financial Services (DFS) said that banks need to let it know about any virtual currency plans at least 90 days before commencing the activity. The rules apply even if any portion of those activities are to be conducted by a third party.

Lawmakers highlight risks from fraud and scams, high volatility, legal uncertainties and inaccurate or misleading representations and disclosures by crypto-asset companies.

The statement continues: "The agencies continue to assess whether or how current and proposed crypto-asset-related activities by banking organizations can be conducted in a manner that is safe and sound, legally permissible, and in compliance with applicable laws and regulations, including those designed to protect consumers."

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