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FDIC to Banks Considering Crypto: Ask for Permission, Not Forgiveness

2 min read
May 17, 2022

Interest in cryptocurrency is surging. Sixteen percent of Americans report having invested in, traded, or used cryptocurrency—including 43 percent of men between the ages of 18 and 29, according to the Pew Research Center.

Cryptocurrency is particularly appealing to Asian (23 percent), Hispanic (21 percent), and Black (18 percent) adults compared to White adults (13 percent). Pew found household income had no impact on cryptocurrency usage.

With demand on the rise, many banks and credit unions are thinking about if and how they should get involved in the growing crypto market, and regulators, including the FDIC are taking notice.

In April 2022 the FDIC issued a letter requiring FDIC-supervised institutions to notify its FDIC Regional Director and its state regulator if considering getting involved in or has already engaged in “crypto-related activities.” It should also inform its state regulator. The FDIC expects institutions to describe the activity in detail and include a proposed timeline.

What are crypto-related activities?

The definition of crypto-related activities is a moving target. The FDIC’s letter recognizes that cryptocurrency is a rapidly evolving field where a steady stream of innovation makes it hard to conclusively define all crypto-related activities.

Since it can’t provide a conclusive list, the FDIC wants detailed notification of crypto-related activities so it can assess the risks.

Crypto-related risks: Areas of FDIC concern

The FDIC will use information provided by FDIC-supervised institutions to evaluate three key risks (and reserves the right to evaluate others as well):

Safety and soundness. Safety and soundness is always a top priority. Considerations include:

  • Ownership issues
  • Anti-money laundering
  • IT security
  • Challenges measuring asset quality, credit risk, and counterparty risk exposure
  • Market risk (adequate methods for pricing and valuation)
  • Accounting, auditing, and financial reporting of crypto assets & activities
  • Liquidity & volatility

Financial stability. From a potential run on crypto assets to operational failures that could destabilize involved institutions, unintended consequences of crypto activities could pose systemic risks to the financial system.

Consumer protection. Cryptocurrency is speculative. Financial institutions are known for the stability of deposits and deposit insurance. What if consumers don’t understand the difference? Meanwhile, the evolving nature of crypto makes it ripe for claims of UDAAP violations.

What does the FDIC’s letter on cryptocurrency and crypto-related activities mean for banks?

The FDIC’s letter doesn’t come as a surprise. Acting FDIC Chairman Martin Gruenberg included evaluating crypto-related risks among the FDIC’s 2022 supervisory priorities along with strengthening the Community Reinvestment Act (CRA), addressing the financial risks of climate change, reviewing bank merger processes, and finalizing the Basel III Capital Rule.

Gruenberg warned that “robust guidance” from the agencies will be needed to manage the risk of crypto-asset activities.

The FDIC’s letter is a reminder that is always a good idea for a financial institution to talk to its regulator about new business strategies—and it’s absolutely necessary if that business strategy involves cryptocurrency or related activities.

The agencies want to be sure that financial institutions have the risk management resources and systems in place to successfully identify, assess, measure, mitigate, and monitor risk. They want to know that an institution is asking the right questions and is able to answer them thoughtfully.

The FDIC and its agency counterparts don’t want to see a financial institution fail, and they certainly don’t want to risk the safety and soundness of financial system.

Good risk management—including proactive communication with regulatory agencies—makes it possible for banks, credit unions, and other financial companies to innovate thoughtfully.


Related: What Is A Compliance Management System And Why Your FI Needs One

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