The Federal Deposit Insurance Corporation has warned that uncertainty around crypto’s legal status, the likelihood of fraud and contagion present key risks to United States banks.
Crypto-assets and their related activities present key risks to the United States banking system and warrant closer supervision, warns a leading U.S. financial regulator.
For the first time, cryptocurrency was given a dedicated section in the Federal Deposit Insurance Corporation’s annual risk review, calling digital asset risks “novel and complex.”
The Aug. 14 Risk Review 2023 report highlights what the FDIC argues are key risks to banks — and comes after it noticed an increased banking interest in crypto activities.
“The FDIC has been generally aware of the rising interest in crypto-asset-related activities through its normal supervision process,” it wrote.
However, with “significant market volatility in 2022,” more information is needed to understand crypto-related risks, it said.
“Crypto-asset-related activities can pose novel and complex risks to the U.S. banking system that are difficult to fully assess.”
Some of the key risks it identified included the uncertainty about the legal status of cryptocurrencies, the likelihood of fraud and possible contagion and concentration risk due to the interconnectedness of crypto businesses.
The FDIC also said the dynamic nature and rapid innovation of cryptocurrencies increased the difficulty of assessing risk in the space.
Another concern was the run-risk susceptibility of stablecoins which the FDIC said could expose stablecoin holding banks to deposit outflows.
The FDIC’s report follows the March banking crisis, which saw Silicon Valley Bank, Silvergate Bank and Signature Bank all collapse or be forced to close in the space of a week.
All three banks were notable for providing banking services to the U.S. crypto industry. SVB’s closure caused USD Coin to depeg from the dollar after its issuer Circle disclosed it could not withdraw $3.3 billion worth of reserves from the bank causing a panic sell-off.
The FDIC and other U.S. regulators stepped in to backstop the banks and sell off their assets to other financial institutions.