In response to growing consumer demand for bitcoin and other cryptocurrency-related services, an increasing number of banks in the United States under the umbrella of the Federal Deposit Insurance Corporation are exploring the digital currency space.

The trend reflects the interlinkage of crypto assets and associated products and services with the regulated financial system.

According to data by the FDIC, as of January 2023, about 52 million Americans have invested in bitcoin and various types of crypto assets, and 136 banks were planning or already involved in various crypto-related initiatives.

The Office of Inspector General, an independent office within many US government agencies, published a report on February 17, indicating the growing involvement of banks in the digital assets industry.

The report also calls for proper guidelines for lenders under the FDIC mandate, emphasizing the need to ensure that their policies and procedures consider the risks associated with digital assets, especially regarding deposit insurance.

Despite not having a direct role in the regulation or oversight of cryptocurrencies, the FDIC provides insurance to protect depositors in case of bank failures, and there have been discussions about the potential for the FDIC to regulate cryptocurrency custodians.

Cryptocurrency custodians hold digital assets on behalf of others, similar to how banks hold traditional assets such as cash and securities.

The OIG report emphasizes the FDIC’s role in support of the U.S. financial system, as it insures nearly $10 trillion in deposits at more than 4,700 banks, supervises over 3,200 banks, and oversees the $125 billion Deposit Insurance Fund (DIF) that protects bank depositor accounts and resolves failing banks.

The increasing involvement of banks in the digital assets industry demonstrates the growing demand for cryptocurrency-related services and reflects the increasing popularity of assets such as Bitcoin.

At the time of writing, Bitcoin’s market cap is around $461 billion, while the total market cap of all cryptocurrencies is $1.05 trillion, data from Coingecko and TradingView show. Bitcoin is currently trading at $23,908, data shows.

The FDIC needs to work with other regulators to provide clarity regarding the regulation of digital assets and ensure that its examinations, policies, and procedures address consumer risks regarding digital assets, including the relationship between deposit insurance and digital assets.

The FDIC has generally taken a cautious approach towards cryptocurrencies due to the perceived risks they pose to the broader financial system. However, despite these concerns, many banks under the FDIC have been exploring the crypto space in response to growing consumer demand for cryptocurrency-related services.

While the FDIC has not been directly involved in regulating cryptocurrencies, there have been discussions around the potential for the agency to play a role in regulating cryptocurrency custodians – companies or individuals that hold digital assets on behalf of others.

As the US government attempts to establish a clear regulatory framework for managing the cryptocurrency industry, the recent Executive Order by US President Joe Biden is expected to provide more clarity on how cryptocurrencies will be regulated going forward.

While it is not yet clear what specific regulations will be put in place, the order is expected to signal a more proactive approach to managing the risks associated with cryptocurrencies, and it will likely have implications for banks and other financial institutions operating in the space.

-Featured image from DataDrivenInvestor

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