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A new assessment by the Federal Deposit Insurance Corporation (FDIC)’s  Office of Inspector General has brought to light substantial gaps and deficiencies in its ability to provide clarity to member banks on policies and procedures regarding crypto activities.

The review of risk assessment strategies stemmed from the crypto-asset sector’s wild volatility since 2020, reaching $3 trillion in market capitalization by November 2021, only to plummet to $1.2 trillion as of April 2023. Such fluctuations underscore several potential risks regarding liquidity, market pricing, and consumer protection that the FDIC must be aware of.

However, the FDIC’s efforts to address these potential risks have been found inadequate. The Inspector General found that the FDIC had failed to assess the significance and potential impact of crypto asset risks, leaving a significant gap in its approach to dealing with this rapidly evolving sector. In fact, the Inspector General found the FDIC had not addressed its own actual capacity for managing such risks, writing:

“Specifically, the FDIC has not yet completed a risk assessment to determine whether the Agency can sufficiently address crypto-asset related risks through actions such as issuing guidance to supervised institutions.”

Compounding the issue, the FDIC has not defined a straightforward process for supplying supervisory feedback for its member banks’ crypto-related activities. The report found that the FDIC failed to adequately communicate with member banks between March 2022 and May 2023, when it asked several member institutions to cease crypto activities without providing adequate reasoning or follow-up.

In light of these findings, the FDIC Inspector General made two recommendations. The first would be for the FDIC to establish a plan with specified timeframes for assessing risks associated with crypto-related activities. Second, it wrote the FDIC should update and clarify the supervisory feedback process related to its review of supervised institutions’ crypto-related activities.

The FDIC has agreed to these recommendations and has set a deadline of January 30, 2024, to complete the corrective actions.

The findings from the Office of the Inspector General not only highlight the pressing need for legislative action on the issue of crypto asset regulation but also raise questions about the potential implications for the crypto and financial sectors should these risks remain unaddressed. While 2023 has seen plenty of wrangling over the issue in Congress, most of the draft bills so far put forward have failed to gather sufficient bipartisan support.

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