FDIC Crypto Warning Highlights Arm’s-Length Policy of US Banking Agencies

Jimmy Aki
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In its annual risk report for this year, the U.S. Federal Deposit Insurance Corp (FDIC) included cryptocurrency among five overarching classifications. This report provides an overview of the threats the banking regulatory agency views as high-priority.

FDIC 2023 Risk Review Adds Crypto as a Threat

The FDIC, an independent agency responsible for insuring deposits in U.S. banks, has released its 2023 report. The report summarizes its evaluation of risks associated with the country’s economy, financial markets, and banking industry.

The Risk Review offers an outline of the banking landscape from 2022 to early 2023, encompassing notable developments arising from the banking sector stress experienced in March 2023.

This includes the notable failures of three major banking institutions – Silvergate, Signature, and Silicon Valley Bank – in March and May, underscoring specific risks inherent in the banking sector.

The Risk Review delineates the primary risks affecting banks across five overarching categories: credit risk, market risk, operational risk, crypto-asset risk, and risk associated with climate-related financial factors.

The newly introduced section, crypto-asset risk, delves into the FDIC’s strategy for comprehending and evaluating markets and activities linked to crypto assets.

The report highlights that the crypto asset realm encountered substantial market volatility in 2022, uncovering several vulnerabilities.

This was due to the alignment of crypto asset industry growth with a heightened interest from certain banks in engaging with crypto asset operations.

The report underscores that crypto assets present intricate and pioneering risks that are difficult to fully gauge.

According to the review, this complexity arises from the ever-changing nature of crypto assets, the dynamic crypto marketplace, and the fast tempo of innovation.

In addition, the report identifies key risks linked to crypto assets and those participating in the sector.

These risks include fraud, legal ambiguities, deceptive or erroneous representations and disclosures, platform vulnerabilities, and other operational facets.

Furthermore, the report accentuates the potential for contagion risk within the crypto-asset sector, stemming from interdependencies among certain crypto-asset participants.

It noted that this kind of risk could expose banks with exposure to the crypto-asset sector to concentration risks.

For instance, the report points out that stablecoins’ susceptibility to risk could trigger potential deposit outflows for banks holding reserves in stablecoins.

FDIC Steps to Mitigate Crypto Risks

The report reaffirms the consistent stance of U.S. banking agencies, including the Office of the Comptroller of the Currency and the Federal Reserve.

This suggests that banks should maintain caution with digital assets unless their federal overseers are comfortable with their specific actions.

As per the report’s findings, the FDIC and other regulatory bodies in the banking sector have taken various measures to address the emerging risks posed by crypto assets.

Furthermore, it noted that while the FDIC had been aware of certain banks’ interest in crypto-related activities through regular supervision, its increasing intensity led the agency to recognize the necessity for a deeper understanding of associated risks.

Consequently, in April 2022, the FDIC released Financial Institution Letter (FIL) 016-2022, requiring FDIC-supervised institutions to inform the FDIC about their current or planned crypto-related engagements.

Also, on July 29, 2022, the agency issued a public fact sheet about FDIC deposit insurance and its relationship to crypto companies.

Simultaneously, an advisory was provided to FDIC-insured institutions outlining deposit insurance considerations when dealing with crypto companies.

More recently, in January 2023, the FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency (OCC) jointly issued a statement concerning the risks associated with crypto assets for banking organizations. This statement emphasizes the importance of ensuring the safe and secure execution of crypto asset-related activities.

Following this, in February 2023, the FDIC, Federal Reserve, and OCC issued yet another collaborative statement.

The statement discusses the liquidity risks that arise for banking organizations due to vulnerabilities in the crypto asset market.

Wrapping up the review of crypto-asset risk, the report highlights that the FDIC, in collaboration with other federal banking agencies, maintains vigilant oversight of crypto-asset-related exposures within banking entities.

Additionally, it noted that the FDIC plans to issue further statements on the involvement of banking organizations in crypto asset-related undertakings.

The report also underscores that the FDIC has established robust processes for conducting thorough supervisory dialogues with banking organizations for proposed and existing activities related to crypto assets.

About Jimmy Aki PRO INVESTOR

Based in the UK, Jimmy is an economic researcher with outstanding hands-on and heads-on experience in Macroeconomic finance analysis, forecasting and planning. He has honed his skills having worked cross-continental as a finance analyst, which gives him inter-cultural experience. He currently has a strong passion for regulation and macroeconomic trends as it allows him peek under the global bonnet to see how the world works.