The growing popularity of cryptocurrencies like Bitcoin and Ethereum has bank regulators in the US concerned about the risks they pose to the country’s financial system. US President Joe Biden recently directed government agencies to assess the risks associated with cryptocurrencies, citing the potential for disruption of financial transactions and consumer confusion. In the meantime, the FDIC is trying to help banks and other financial institutions determine how they can best protect their customers.
Financial institutions must notify the Federal Deposit Insurance Corporation (FDIC) if they are planning to engage in any crypto-related activity. The FDIC says the activities pose a significant safety and soundness risk, as well as a systemic risk. The regulator also points to consumer protection concerns, evolving credit risks, and operational risk. The FDIC has not fully evaluated these risks, and banks are encouraged to report new activities to the agency as soon as possible.
Banks must notify the FDIC of any activity involving crypto-assets, as this could cause “street” in the assets of companies, or result in confusion among consumers. To avoid any such risk, entities must notify the regulator of any cryptocurrency-related activity, including the details of the activity, proposed timeline, and the intended effect on the financial system. The FDIC will review the details of the proposed activity, and will decide whether the activity is safe and stable. It is also important to note that the regulations are designed to protect the consumer, and the FDIC’s rules do not cover all aspects of cryptocurrency.
The federal banking agencies have long subjected banks in the United States to capital requirements, which were boosted after the Great Financial Crisis. However, the FDIC’s new rules apply to all banks, including those that are FDIC-insured. While this does not apply to Kraken, it does have capital requirements under the Wyoming Division of Banking. Because of these restrictions, the government is seeking to protect Americans from a financial panic.
The new attention is setting up a fight between the cryptocurrency industry and the financial regulators. This is fueling tension between upstarts and traditional firms that dominate the payments industry. While Bitcoin is grabbing headlines as a speculative investment, virtual currencies are becoming increasingly interwoven with the U.S. financial system. However, the government must remain vigilant and ensure that financial institutions provide the necessary information to safeguard the financial system.