The FDIC has cautioned that doubts concerning the legal status of crypto and the possibility of fraud and contagion are a threat to banks in the United States.
A leading financial regulator in the United States has cautioned that crypto asserts and their associated activities are a threat to the nation’s banking system and evoke the need for stricter supervision. For the first time, cryptocurrency was offered an exclusive section in the FDIC yearly risk assessment, terming the digital asset risks’ novel and intricate.’
The August 14 Risk Review 2023 report underscores what the Federal Deposit Insurance Corporation believes are major risks to banks. Further, this report follows the discovery of a high banking interest in crypto activities.
Market Volatility Portrays Crypto as Risky Assets
It wrote that the government corporation had been generally aware of the increasing interest in crypto asset-associated activities via its usual regulation process. Nevertheless, the considerable market volatility in 2022 evokes the need for additional data to understand the risks associated with crypto.
Activities linked to crypto assets can have novel and intricate to the United States banking system and might be hard to entirely evaluate. Uncertainty regarding cryptocurrencies’ legal status, the possibility of fraud and probable contagion, and concentration risk owing to crypto businesses’ interconnectedness are examples of identified key risks.
Pacy Innovation in Crypto Space Intensifies Difficulty to Evaluate Risk
The FDIC also claimed the cryptocurrencies’ quick innovation and dynamic nature intensified the difficulty of evaluating risk in the space. Another concern entailed the stablecoins’ run-risk vulnerability. According to the FDIC, the situation could expose banks holding stablecoins to deposit outflows.
The report by FDIC follows the banking crisis in March that resulted in the collapse or quick closure of Silvergate Bank, Silicon Valley Bank, and Signature Bank. The three banks were famous for offering banking services to the United States crypto industry.
The closure of Silicon Valley Bank resulted in the depegging of the USD Coin from the dollar after Circle, its issuer, divulged that it could not withdraw $3.3 billion from the bank. As such, a panic sell-off occurred.
The Federal Deposit Insurance Corporation and other regulators in the United States intervened to backstop the banks and dispose of their assets to other financial institutions.
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