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FDIC warns about cryptocurrencies in letters to banks

The United States Federal Deposit Insurance Corporation (FDIC) has written to the banks it oversees, raising concerns about the risks associated with cryptocurrency activities.

“Cryptocurrency-related activities can pose significant health and safety risks, as well as concerns about financial stability and consumer protection. Furthermore, these risks and concerns are evolving as crypto-related activities are still not fully understood,” the FDIC said in a letter published yesterday.

The FDIC is a government agency that provides deposit insurance to commercial and savings banks in the United States. If a bank fails to repay its loans, the agency can help make up for the loss of depositors. As of 2021, there are nearly 5,000 the agency-insured banks.

The agency’s letter requires all regulated institutions considering engaging in crypto-related activities to notify the regulator of their intentions.

In signaling their intentions, these entities are also required to “provide all information necessary to enable the FDIC to engage with the organization regarding the risks involved.”

The FDIC has continued to provide a description – although not an all-inclusive – of the risks associated with cryptocurrencies it has identified.

Cryptocurrency Risks

The agency cited numerous risks associated with cryptocurrencies, ranging from financial safety and stability to consumer protection and financial crime.

Under the “Safe and Healthy” section of the FDIC letter, crypto-related activities represent “new, enhanced or unique credit, liquidity, markets, pricing and risks” activities that may raise health and safety concerns.”

The same section also explicitly mentions financial crime. “There is a lot of anti-money laundering/counter-financing activity for terrorist effects and concerns regarding crypto assets, including reported cases of crypto assets being used for illegal activities,” the letter read.

The agency is also concerned about how the cryptocurrency market could pose systemic risks to the broader financial system.

“Disruptions in crypto-asset transactions or crypto-related activities may result in a “race” on financial assets that back crypto-assets or crypto-related activities.”, FDIC wrote.

The FDIC is not the first to raise concerns about cryptocurrencies and financial stability. The Bank of England did the same in October 2021.

Finally, the letter raises concerns about consumer protection.

“The FDIC is concerned about the risk of consumer confusion regarding crypto-assets offered by, through, or in connection with insured custodial institutions, as consumers may not understand the role they play. role of banking or the speculative nature of certain crypto assets,” the regulator added.