According to the FDIC, 136 insured banks in the US are involved in crypto assets or are planning some type of activity. This includes allowing customers to buy or sell cryptocurrency or provide services to exchanges for crypto assets, such as bank deposits, custody, or lending.

Last week, the FDIC’s Office of Inspector General (OIG) released its annual report on the key challenges facing the FDIC. Monitoring the risks posed by digital assets is one of the nine concerns.

He highlighted the volatility risk of digital assets, citing Silvergate as an example. About 90 percent of its deposit base was related to digital asset clients, and there was a reduction from about $11.9 billion in deposits to $3.8 billion in a quarter. “The bank sold $5.2 billion of debt securities at a loss of $718 million, which is greater than the bank’s total earnings since approximately 2013,” the report says.

So volatility risks for banks was one of the topics mentioned. He reiterated the risks of digital assets mentioned in a joint January warning from the FDIC, OCC, and Federal Reserve.

Conflicts of interest

Conflicts of interest were highlighted in the report. The Government Ethics Office introduced a rule in mid-2022 for employees holding a cryptocurrency or stablecoin. If their work could directly affect the value of cryptocurrencies, they should be out of the business.

The FDIC expanded this guidance to say that if an employee holds Ethereum crypto, they can only participate in a bank digital asset exam that does not include Ethereum. As more banks get involved in the digital asset sector, it can be difficult to find conflict-free staff.

Beyond the government, we have repeatedly seen trade deals announced where there was a rise in the price of cryptocurrency prior to publication.

While the FDIC Inspector General said that digital assets had been included in FDIC challenge reports since 2018, it wasn’t considered that big of an issue until this year. Last year’s report treated digital assets as a subset of cybersecurity risks.

Meanwhile, the FDIC is not happy with crypto companies that vaguely and falsely refer to FDIC insurance coverage. He sent a cease and desist letter to FTX in August of last year, several months before his bankruptcy. Late last year, the FDIC Chairman said that he wanted stablecoins that are used for daily payments issued on permissioned blockchains instead of public blockchains.