The Federal Deposit Insurance Corporation (FDIC) drew attention to the potential risks of cryptocurrency transactions to the US banking system in its 2023 annual risk review. As the primary agency that insures deposits and supervises financial institutions in the US, the FDIC allocated a significant section in the report to examine the risks associated with cryptocurrencies within a broader context of economic, credit, market, and operational challenges for banks.
Complex Risk Emphasis Regarding Cryptocurrencies in the Report
2022 was a tumultuous year for the cryptocurrency market. Major crypto companies such as Terraform Labs, BlockFi, Celsius, Three Arrows Capital, and FTX filed for bankruptcy. This upheaval had repercussions in the banking sector, with crypto-friendly banks like Silvergate and Silicon Valley Bank collapsing. While acknowledging the awareness of financial institutions about the problems they face regarding cryptocurrencies, the FDIC emphasized the need for more detailed information to adequately assess the associated risks.
The FDIC’s assessment highlighted that cryptocurrencies are filled with new and complex risks that are difficult to fully understand due to their dynamic and innovative nature. The report underlined various threats related to cryptocurrencies such as fraud, legal uncertainties, misleading information, immature risk management, and security vulnerabilities on platforms. It also pointed out the contagion risks in the cryptocurrency sector as a significant concern, which could jeopardize banks conducting large transactions with cryptocurrencies. Additionally, it emphasized the potential deposit outflows from banks holding stablecoins due to the current conditions they face.
FDIC and Other US Institutions’ Battle with Cryptocurrencies
As a proactive move concerning cryptocurrencies, the FDIC published a Financial Institution Letter in April 2022, requiring regulated organizations to disclose all their transactions related to cryptocurrencies to assist in risk assessment. In May 2022, the FDIC implemented a rule to combat false statements regarding deposit insurance and followed it up with cease and desist orders targeting companies implying FDIC coverage for cryptocurrencies in August.
By January, it was observed that the FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency (OCC) made a joint statement regarding cryptocurrency risks. This joint statement called on banks to undertake transactions with cryptocurrencies safely and legally in line with consumer protection standards.
Three US institutions that highlighted liquidity concerns due to funding from cryptocurrency-related sources also emphasized that as long as banks comply with regulations, offering cryptocurrency services is not completely banned.
