beincrypto.com
The 2023 Risk Review released by the Federal Deposit Insurance Corporation (FDIC) on Monday outlined challenges in the US banking system. The report emphasized the new category of crypto risks and its effect on institutions under the federal regulator.
Established to maintain stability and bolster public confidence in the nation’s financial system, the FDIC stated:
“Crypto-asset-related activities can pose novel and complex risks to the US banking system that are difficult to fully assess.”
Crypto Market Volatility 2022 Flashbacks
2022 was a volatile year in the crypto-asset sector, but FDIC also notes a surge in interest among some banks during this time. Citing its actions in the industry, FDIC notes that the risks are many. It highlights that fraud, legal gray areas, misleading representations, immature risk management practices, and platform vulnerabilities are some of the top concerns.
However, the regulator noted,
“Part of the difficulty in assessing these risks arises from the dynamic nature of crypto-assets, the crypto marketplace, and the rapid pace of innovation.”
In 2022, FDIC also issued the Financial Institution Letter (FIL), asking FDIC-supervised institutions to disclose crypto-related activities.
In May, another rule that focused on the availability of deposit insurance was finalized. FDIC also informed FDIC-insured institutions soon after about the relationship between deposit insurance and crypto companies.
Read more: Crypto vs. Banking: Which Is a Smarter Choice?
Regulators Grow Strict Without a Framework
The regulator has given multiple warnings against misleading practices in the crypto sphere. Over 85 entities faced action for misrepresentation related to deposit insurance availability in 2022. In one instance, the FDIC issued cease and desist letters to five firms that falsely claimed that crypto-assets were FDIC-insured.
However, mere risk highlighting can’t mitigate the crypto industry’s challenges. A regulatory framework is essential.
A positive stride in this direction came when the House Financial Services Committee approved the Financial Innovation and Technology for the 21st Century Act (FIT Act) and the Blockchain Regulatory Certainty Act. Despite this progress, a comprehensive crypto regulation in the US is still missing.
The United States Federal Reserve recently launched an operation to manage better the risks linked to banks engaging with cryptocurrencies. But the apex bank missed the banking plight in the US.
Rating agencies, including Moody’s, have flagged major banks for funding risks. A recent downgrade of ten small to mid-sized US banks by Moody’s is underlining a not-so-hidden banking crisis in America.
As fintech rapidly evolves, US regulators and the banking system will have to better adapt to the risk and innovation aspects of the industry.