FDIC Issues Warning Over Increased and Complex Crypto-Related Risks

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The Federal Deposit Insurance Corporation (FDIC) has issued a fresh warning to financial institutions about the increased and complex risks associated with crypto-related activities.

In its 2023 risk review report released Monday, the agency said that crypto-assets “pose novel and complex risks to the U.S. banking system that are difficult to fully assess.” Created in 1933, the FDIC is tasked with assessing risks facing financial institutions and saving struggling banks.

The report also highlighted various risks associated with crypto-assets and crypto-asset sector participants, including fraud, legal uncertainties, misleading disclosures and poor risk management practices among others, noting that banks ran the risk of suffering for engaging in crypto activities.

“Possible contagion risk within the crypto-asset sector resulting from interconnections among certain crypto-asset participants may present concentration risks for banks with exposure to the crypto-asset sector,” the FDIC wrote adding, ”Susceptibility of stablecoins to run risk can create the potential for deposit outflows for banks that hold stablecoin reserves.”

The agency urged financial institutions to carefully consider the risks associated with crypto-related activities before engaging in them. It also said that it will continue to monitor crypto-asset risks and take steps to mitigate them noting that it was working with other federal banking agencies to closely monitor crypto-asset-related activities of banking organizations.

FDIC’s warning comes even as the crypto market continues to face increased scrutiny from regulators around the world. Last year the crypto sector experienced significant market volatility, exposing several vulnerabilities to banks such as the Silicon Valley Bank and Silvergate, prompting the FDIC to come to their aid.

These risks have prompted the FDIC to become increasingly vocal about cryptocurrencies even as more banks angle towards that direction. In April last year, the agency issued a letter requiring all FDIC-supervised institutions requiring them to report any involvement in crypto-related activities to enable it to assess their soundness. 

In July 2022, the FDIC issued a fact sheet to crypto companies, detailing the risks and concerns associated with misrepresentations and misconceptions about deposit insurance coverage in the context of crypto assets. The fact sheet also provided guidance on risk management and governance considerations for crypto companies.

More recently in January, the FDIC, the Federal Reserve, and the OCC released a joint statement reminding banks to ensure that crypto-asset-related activities are conducted safely and soundly, are legally permissible, and comply with applicable laws and regulations. 

Notably, since 2022, the FDIC has taken action against more than 85 entities that were misrepresenting the nature, extent, or availability of deposit insurance, including various crypto entities.

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