FDIC Urged to Provide Clarity on Crypto Asset Risks to Member Banks

The Federal Deposit Insurance Corporation (FDIC) is facing scrutiny over its handling of crypto assets, with concerns emerging that its lack of clarity on the risks involved is pushing member banks to steer clear of cryptocurrencies.

In a recent report titled "FDIC Strategies Related to Crypto Asset Risks," released by the FDIC's Office of Inspector General (OIG), a call for the FDIC to conduct a thorough risk assessment of crypto assets and offer unambiguous guidance to member banks regarding these risks has been made.

The OIG's findings suggest that while the FDIC has started to develop strategies to address the risks posed by crypto assets, it has not yet completed a comprehensive risk assessment. This assessment is crucial for determining whether the agency can effectively address crypto asset-related risks through actions like issuing guidance to supervised institutions. The report highlights that the FDIC's communication to supervised institutions thus far has been unclear.

Crypto assets have witnessed dramatic swings in value, from around $132 billion in January 2019 to a staggering $3 trillion in November 2021, before dropping back to approximately $1.2 trillion in April 2023. Unlike traditional investments, crypto assets operate with minimal regulatory oversight and often lack transparency in their management structures and risk disclosures.

Moreover, the crypto industry has seen the spectacular failure of several major exchanges, such as FTX, and increased regulatory scrutiny on platforms like Binance. These factors, along with the historical association of crypto assets with fraudsters, hackers, and sanctions evaders, have led regulators to view the sector with suspicion.

In 2021, the FDIC, along with the Treasury Department's Office of the Comptroller of the Currency and the Federal Reserve Board, committed to examining crypto asset risks in 2022. They issued joint statements warning banks about the risks and liquidity issues associated with crypto assets. However, the OIG's report suggests that the warnings provided by the FDIC and other regulators have not been specific enough to be practical for banks and financial institutions, particularly regarding supervisory guidance on crypto assets.

One illustrative example in the report pertains to the FDIC issuing "pause letters" to certain member banks between March 2022 and May 2023, asking them to halt or not expand planned or ongoing crypto-related activities and requesting specific information about these activities.

However, the FDIC did not establish a timeframe for reviewing this information or describe the end of the review process, leaving supervised institutions uncertain about the agency's stance on their crypto asset activities and how to reduce potential risks.

The report emphasizes that the FDIC has not assessed the significance of crypto assets to determine the magnitude of impact, likelihood of occurrence, and nature of the risks. It also noted the absence of mitigation strategies, such as guidance to financial institutions, to ensure that risks are managed within defined risk tolerance levels.

The FDIC, responsible for promoting financial stability and protecting consumers from financial harm, has committed to addressing these gaps by following the OIG's recommendations. The recommendations include establishing a plan with timeframes for assessing risks related to crypto activities and updating and clarifying the supervisory feedback process for institutions engaged in crypto-related activities. The FDIC aims to complete these corrective actions by January 30.

The report underscores the importance of regulatory clarity in the fast-evolving world of cryptocurrencies and the necessity for supervisory bodies to provide banks with practical guidance to navigate the risks associated with these digital assets effectively.

By fLEXI tEAM