Crypto-Assets Present Novel and Complex Risks: FDIC 2023 Risk Review

• Crypto-asset sector’s volatility in 2022 exposes vulnerabilities.
• FDIC’s 2023 Risk Review highlights novel and complex risks in crypto-assets.
• Risks include fraud, legal issues, operational vulnerabilities, and contagion.

The crypto-asset sector witnessed substantial market volatility throughout 2022 that revealed several vulnerabilities within the industry. Even so, its remarkable growth saw numerous banks express interest in engaging in crypto-asset activities.

While crypto-assets have gained traction, the recently released annual Risk Review by the Federal Deposit Insurance Corporation (FDIC) underscores that the allure of these assets comes hand-in-hand with a web of intricate risks. Moreso, the complex and evolving nature of the industry makes assessing the risks challenging. As the report states:

Crypto-asset-related activities can pose novel and complex risks to the U.S. banking system that are difficult to fully assess.

The report cited risks that include potential fraud, legal uncertainties, misleading disclosures, underdeveloped risk management practices, operational vulnerabilities, and the danger of contagion due to interconnectedness among crypto-asset participants. Of particular concern are stablecoins, whose susceptibility to run risk can create the potential for deposit outflows for banks holding reserves of these assets.

Notably, the FDIC and other banking regulators have taken steps to address the emerging risks. Further updates and statements related to crypto-asset-related activities by banking organizations are expected as part of the FDIC’s ongoing efforts.

The FDIC’s report follows the collapse of three major banks – Silicon Valley Bank, Silvergate Bank, and Signature Bank – that sent shockwaves through the financial sector. These banks, known for their pivotal role in serving the U.S. crypto industry, succumbed to the complex and unpredictable risks inherent in the crypto-asset realm.

In the 2023 Risk Review, cryptocurrency was given a dedicated section for the first time. The FDIC’s Annual Risk Review reports provide a detailed analysis of potential risks facing the U.S. banking system. The reports cover a wide range of topics, including credit risk, market risk, operational risk, and emerging risks.