FDIC Scrutiny of Crypto Industry Risk Necessary as Institutional Investors and Banks Embrace Digital Asset Space
The higher number of casualties and investment write-offs in the recent FTX liquidity crisis warrants increasing regulatory scrutiny to avert a contagious crypto meltdown. The downtrend witnessed since the FTX downfall constitutes the cornerstone to initiating a comprehensive regulatory framework. Its integration will deliver the much-needed regulatory-backed scrutiny to protect and shield crypto investments from fraudulent activities.
In support, Cake DeFi co-founder Julian Hosp considered the priority of regulatory-backed risk assessment would deter fraud that is holding back asset managers, banks, and hedge funds. Priority in crypto risk assessment is timely, given the significant crypto adoption by the iconic players in traditional finance.
Uncertain Regulatory Environment
Client demand for crypto services integrated with conventional financial services has pushed their launch in banks. BNY Mellon head Robin Vince indicated that providing institutional-based crypto services is necessary for hedge funds and asset managers to engage in the tokenized asset in the future. Nevertheless, comprehensive regulations need to be more comprehensive to turn off most investors and traditional finance players.
BitGo head, Adam Sporn, attributed the slow institutional adoption of cryptos to the uncertain regulatory environment. While several venture capital firms have invested within the digital asset space, FTX downfall scenarios are unavoidable since the cryptos industry is evolving in a context lacking regulatory clarity. Further, the delay in formulating a comprehensive regulatory framework drives US firms to relocate to foreign jurisdictions. It implies that firms moving overseas are relocating innovations elsewhere.
The Sudden Exodus into Digital Assets
BNY Mellon led to entry into the digital asset arena– regarded as the pioneer bank in America- by realigning the digital custody platform targeting to safeguard Bitcoin and Ether institutional clients. Similarly, Fidelity’s retail segment expanded to accommodate the commission-free trading services in crypto. Moreover, France’s Société Générale bank secured regulatory approval to provide digital assets services.
The move by established financial players demonstrates that integrating digital assets into their portfolios is inevitable for traditional financial institutions. In his remarks, Aquanow principal Sebastien Davies acknowledged that the incumbent must have deeper to embrace emergent asset class given the turbulent crypto market conditions witnessed in 2022.
Sebastian observed that conventional banks have considered that the high uptake of cryptos among Generation Z and Millennials is enough reason to venture into digital assets. Furthermore, the younger generations are inheriting over $73 trillion in two decades, a reason US banks should venture into digital assets.
The necessity for Crypto Risk Assessment
The Federal Deposit Insurance Corporation (FDIC) considers that unrealized losses exceeding $470 billion will readily push more US banks to engage in cryptos activities. In particular, FDIC chair Martin Gruenberg suggested to the Senate Banking Committee hearing that the higher interest rates, geopolitical tensions, and economic uncertainty is straining conventional financial players. The strain translates to massive losses, as witnessed in the second quarter.
FDIC forecasts the trend will only accelerate banks’ interest in crypto-asset activities. As such, the absence of regulatory clarity and a bearish crypto market will not deter institutional adoption of digital assets. However, a cautious engagement with crypto assets is necessary, considering the numerous collapses that leave investors with huge losses. It mandates FDIC to prioritize crypto risk assessment to protect the banking system from contagious downfalls fueling recent crypto turmoil.
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