- The FDIC’s annual risk report highlights digital assets as a potential risk to US financial stability for the first time
- The report points out risks from crypto-related collapses like Silvergate Bank and Signature Bank, emphasizing interconnectedness in the market, unpredictable deposit flows, and liquidity risks for banks dealing with digital assets
- The report also raises concerns about stablecoins, susceptible to runs affecting banks with their reserves
The Federal Deposit Insurance Corporation (FDIC) has highlighted digital assets as a potential risk to the financial stability of the United States, according to its latest annual risk report. The 2023 Risk Review was released on Monday and features cryptocurrencies for the first time, with the FDIC expressing concerns about the dynamic nature of digital assets, which it says makes assessing their impact on the financial system challenging. It identifies fraud, legal uncertainties, and immature risk management practices as being among the areas of opacity that could cause issues to the American financial system if left unchecked.
Stablecoins Highlighted as Issue
The FDIC’s apprehensions are rooted in the aftermath of notable collapses, such as Silvergate Bank and Signature Bank, both key players in the crypto sector. The agency pointed out that the interconnectedness of actors in the crypto market can amplify risks for banks participating in this domain, as well as noting the unpredictable inflows and outflows of deposits that can lead to liquidity risks for banks dealing with digital asset firms.
Stablecoins also come under scrutiny in the report, as the FDIC sees them as susceptible to runs that could negatively affect the balance sheets of banks holding stablecoin reserves. The report cites the example of Circle’s USDC losing its dollar peg after the closure of Silicon Valley Bank, which had substantial exposure to the stablecoin.
Crypto’s Influence Growing
In its Risk Review, the FDIC also emphasizes a joint statement with the Office of the Comptroller of the Currency (OCC) from January, where both entities advised banks to proceed cautiously with crypto exposure, ensuring that their crypto-related activities are conducted safely, within legal bounds, and in compliance with relevant regulations.
The theory that cryptocurrencies could have an impact on the wider financial landscape in the U.S. shows how far the space has come from 2021 when the Bank of England’s Financial Policy Committee argued that “direct risks to the stability of the UK financial system from cryptoassets are currently limited.”
Whoops. Looks like we’re taking over.
