US regulators have cautioned banks about the risks associated with the cryptocurrency market for the first time ever in a joint statement.

Financial institutions were warned by the regulator to look out for potential fraud, legal uncertainty, and false statements made by companies dealing in digital assets.

Banks were also warned about the industry’s “contagion threat.”

It happens just two months after the fall of the trading site FTX rocked the cryptocurrency sector.

The US Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency stated in a joint statement that they were closely observing the cryptocurrency activity of banking institutions.

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The last year’s events have been characterised by notable volatility and the disclosure of weaknesses in the crypto-asset market, according to the statement.

The regulators added that it was “very likely” that issuing or retaining crypto tokens, which are kept on open, decentralised networks, would be at odds with safe and sound banking standards.

Additionally, banks were urged to take action to stop issues with the digital asset market from affecting the rest of the financial system.

It is crucial that crypto-asset sector risks that cannot be reduced or controlled do not spread to the banking system, it continued.

The decision on Tuesday comes after US financial sector watchdogs had been reluctant for months to give consistent recommendations on cryptocurrencies, despite banks’ requests for clearer guidance from authorities.

FTX shock

The November fall of FTX shook the cryptocurrency market.

Millions of people entered the market for digital assets through it, which was the second-largest bitcoin exchange in the world.

Sam Bankman-Fried, the former CEO of FTX, formally refuted allegations that he had misled investors and consumers on Tuesday.

In a US court, he entered a not guilty plea to charges that he used consumer deposits at FTX to fund his other business, Alameda Research, as well as to purchase real estate and give to political campaigns.

Two of Mr. Bankman-closest Fried’s associates have already entered guilty pleas and are helping with the probe, which has shook the cryptocurrency market as a whole.

One of the most prominent individuals in the industry, Mr. Bankman-Fried was well-known for his political connections, celebrity endorsements, and bailouts of other faltering businesses.

He has been charged by the US with “erecting a house of cards on a foundation of deceit while convincing investors that it was one of the safest buildings in crypto,” according to the US.