Crypto Risks Highlighted in FDIC’s Annual Report

A prominent U.S. financial regulator warns that crypto-assets and their associated activities pose significant risks to the U.S. banking system and require tighter oversight.

In the Federal Deposit Insurance Corporation’s first-ever dedicated section of its annual risk assessment, digital asset risks were described as “novel and complex.”

The Risk Review 2023 report, released on August 14, focuses on what the FDIC deems to be the most significant hazards to banks and comes after the FDIC observed an increase in 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 stated.

However, “significant market volatility in 2022” necessitates more information to comprehend crypto-related risks.

“Crypto-asset-related activities can pose novel and complex risks to the U.S. banking system that are difficult to fully assess.”

Uncertainty regarding the legal status of cryptocurrencies, the likelihood of fraud, and the possibility of contagion and concentration risk due to the interconnectedness of crypto businesses were identified as key risks.

The FDIC also noted that the dynamic nature and rapid innovation of cryptocurrencies increased the difficulty of risk assessment in the sector.

The FDIC was also concerned about the run-risk susceptibility of stablecoins, which could expose banks holding stablecoins to deposit outflows.

The March banking crisis saw Silicon Valley Bank, Silvergate Bank, and Signature Bank fail or be forced to close within a week.

All three institutions were noteworthy for their provision of banking services to the U.S. cryptocurrency industry.

SVB’s closure prompted USD Coin to depreciate against the dollar after its issuer, Circle, disclosed it was unable to withdraw $3.3 billion in reserves from the bank, resulting in a panic sell-off.

The FDIC and other U.S. regulators stepped in to save the banks and liquidate their assets.