The number of banks around the globe intending to be involved in crypto-related activities is increasing day by day. Recently, the United States Federal Deposit Insurance Corporation (FDIC), an independent federal agency insuring deposits in U.S. banks and thrifts in the event of bank failures made certain revelations in this regard.
According to the FDIC, a significant number of banks in the US under it are exploring the crypto space and intend to offer different services amid rising consumer demand. Data reveals that as of January 2023, about 136 banks were already involved or are planning to be involved in various crypto-related initiatives.
This data from the FDIC was published in a report by the US Office of Inspector General (OIG). The OIG monitors and tracks the use of taxpayer dollars through audits, inspections, evaluations, and investigations.
The OIG report highlighted that in the absence of clear regulations, banking firms are mostly involved with third-party entities to explore the digital currency space. An excerpt from the report:
According to FDIC data, as of January 2023, the FDIC was aware that 136 insured banks had ongoing or planned crypto asset-related activities. For example, these banks have arrangements with third parties that allow bank customers to buy and sell crypto assets. Banks also provide account deposit services, custody services, and lending to crypto asset exchanges.
Notably, the increasing involvement in the digital assets industry indicates the growing demand for crypto-related services and reflects the increasing popularity of assets such as Bitcoin. However, the OIG’s report called for the FDIC to offer proper guidelines for lenders under its mandate.
In addition, the report also challenged the FDIC to ensure that the policies and processes are efficient and address the risks associated with digital assets, especially concerning deposit insurance.
The FDIC should work with other regulators to provide clarity regarding the regulation of digital assets. Further, the FDIC should ensure that its examinations, policies, and procedures address consumer risks regarding digital assets, including the relationship of deposit insurance and digital assets.
The OIG in its report highlighted the need for regulations citing the recent collapses in the crypto ecosystem, especially the crypto exchange FTX. The report revealed that before the bankruptcy filing, FTX was doing business with about 11 banks meaning that they would have been involved in activities like wire transfer fraud.
Further, the report highlighted the increasing need for investors’ protection considering that about 16% of the American population, roughly about 52 million people, have already purchased cryptocurrencies. From this lot, about 46,000 have lost over $1 billion to crypto scams since 2021.
On the other hand, the FDIC has been mostly skeptical about cryptocurrencies suggesting that the industry poses risks to the traditional financial system. The threats of the crypto sector impacting traditional finance have been haunting the regulators. Last week, The Senate Banking Committee discussed in detail what would be required to shield the traditional financial system from the vices of crypto.
The hearing titled “Crypto Crash” explored why crypto needs tighter regulation and safeguards to protect investors, especially after last year’s contagious market collapse. While testifying to the Committee, Lee Reiners, policy director at the Duke Financial Economics Center, recommended that banking agencies restrict the crypto industry from accessing the banking system.