August 15, 2023 at 14:56 GMTModified date: August 18, 2023 at 10:22 GMT
August 15, 2023 at 14:56 GMT

FDIC tags crypto as ‘risky’ to US banking system

The FDIC, which supervises financial institutions in the US, believes crypto-related activities to pose risks to the US banking system.

FDIC tags crypto as ‘risky’ to US banking system

The Federal Deposit Insurance Corporation (FDIC), which supervises financial institutions in the US, believes cryptocurrency-related activities to pose risks to the US banking system. This was revealed in its 2023 annual risk review.

The review dedicated an entire section to the risks associated with crypto-assets. In the same, the FDIC said that “crypto-asset-related activities can pose novel and complex risks to the US banking system that are difficult to fully assess”.

In 2022, the crypto-sector experienced high market volatility, further exposing multiple vulnerabilities. The FDIC listed key risks associated with crypto-assets and crypto-asset sector participants. This includes those related to fraud, legal uncertainties, misleading or inaccurate representations and disclosures, risk management practices, exhibiting a lack of maturity and robustness, and other operational vulnerabilities.

Interconnections among certain crypto-asset participants can also give rise to concentration risks for banks with exposure to this sector, while also posing contagion risk within the crypto-asset sector itself. On top of this, the review also noted the potential for deposit outflows from banks holding stablecoin reserves due to stablecoin run risks.

The FDIC acknowledged the growing interests of banks in crypto-asset-related activities. One of the steps taken in light of its emerging risks has been the release of Financial Institution Letter (FIL), which asks FDIC-supervised institutions to inform the agency about their current and intended crypto-related activities. This could include things like acting as crypto-asset custodians, maintaining stablecoin reserves, issuing crypto and other digital assets, and so on.

In 2022, the FDIC released two documents addressing risks, concerns, and risk management and governance considerations related to misrepresentations and misconceptions about deposit insurance coverage of crypto- assets. The month of May in last year saw the finalisation of a rule that would help address instances in which firms misrepresent the availability of deposit insurance in violation of the law.

This was followed by the FDIC issuing a fact sheet to the public on FDIC deposit insurance and crypto companies in June. It also included an advisory to FDIC-insured institutions on deposit insurance and dealings with crypto companies.

The US government corporation has been stringently taking action against more than 85 entities that were misrepresenting the nature, extent, or availability of deposit insurance, especially since 2022. On 19 August 2022, it issued letters to five companies that had made false representations stating or implying that crypto-assets were eligible for FDIC insurance.

The FDIC takes upon itself to identify and analyse risks that could affect banks. This year’s Risk Review summarised the FDIC’s assessment of risks related to conditions in the US economy, financial markets, and the banking industry for 2022 through early 2023. The sector also saw the failure of three large banking institutions during this time.

The crypto industry also had similar experiences which saw the bankruptcies of major crypto firms, including Terraform Labs, BlockFi, Celsius, Three Arrows Capital and FTX. However, despite 2022’s market volatility in the crypto sector, there has been increasing interest by banks to engage in crypto-asset activities.

The FDIC stated that it has been aware of the rising interest in crypto-asset-related activities through its normal supervision process. As a result, a joint statement on crypto-asset risks was released by the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency in January 2023.

It emphasised the need for banking organisations to ensure that crypto activities are conducted safely, legally and in compliance with consumer protection laws.

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