WASHINGTON — US regulators have issued their first-ever joint warning to banks over the risks associated with the cryptocurrency market.

The watchdogs told financial institutions to be wary of potential fraud, legal uncertainty and misleading disclosures by digital asset firms.

Banks were also cautioned over the "contagion risk" from the sector.

It comes just two months after the collapse of trading platform FTX sent shockwaves through the crypto industry.

In the joint statement, the US Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency said they were closely monitoring the crypto activities of banking organizations.

"The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector," the statement said.

The regulators also said that issuing or holding crypto tokens, which are stored on public, decentralized networks was "highly likely to be inconsistent with safe and sound banking practices".

Banks were also encouraged to take steps to avoid problems in the digital asset market spreading to the wider financial system.

"It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system," it added.

Tuesday's statement comes after months of hesitancy by US financial industry watchdogs to issue uniform guidelines on cryptocurrencies, despite banks inviting clearer advice from regulators.

FTX shock

The cryptocurrency industry was rocked by the collapse of FTX in November.

It was the world's second-largest cryptocurrency exchange and the entry point for millions of people into the digital asset market.

On Tuesday, FTX's former chief executive Sam Bankman-Fried officially denied charges that he defrauded customers and investors.

He pleaded not guilty in a US court to claims that he took customer deposits at FTX to fund his other firm, Alameda Research, buy property and make political donations.

Two of Bankman-Fried's closest colleagues have already pleaded guilty and are cooperating with the investigation, which has shaken the entire cryptocurrency industry.

Mr Bankman-Fried was one of the most high-profile figures in the sector, known for his political ties, celebrity endorsements and bailouts of other struggling firms.

He has been accused by the US of building "a house of cards on a foundation of deception, while telling investors that it was one of the safest buildings in crypto". — BBC