Crypto-Related Activities Ask Before You Leap By Mark Mangano, Jackson Kelly, PLLC “Crypto”-related innovation in financial services is expanding at a dizzying pace. Before 2009 when the first Bitcoin was “mined” into existence, cryptocurrencies did not exist. Now there are over 19,000 cryptocurrencies with a market capital of over $1.2 trillion.1 As much as 22% of the U.S. adult population owns Bitcoin.2 Bank core processing vendors are announcing relationships with Fintechs to add cryptocurrency functions to banks’ service offerings.3 “Crypto” related innovation extends well beyond digital currencies. The term has come to embrace technological and operational innovations supported by blockchains, distributed ledgers, and other technical solutions to disintermediate transactions, including contracts. Against this backdrop, there has been relatively little regulatory guidance for community banks considering whether to adopt “crypto” solutions. In April 2022, the Federal Deposit Insurance Corporation (FDIC) issued Financial Institution Letter FIL-16-2022, “Notification and Supervisory Feedback Procedures for FDIC-Supervised Institutions Engaging in Crypto-Related Activities” (Crypto FIL).4 It is important for bankers to understand three issues related to the Crypto FIL: Definitions, Risks, and Notification. Definitions The Crypto FIL applies to “crypto-related activities,” which the FDIC defines as “acting as crypto-asset custodians; maintaining stable coin reserves; issuing crypto and other digital assets; acting as market makers or exchange or redemption agents; participating in blockchain and distributed ledger-based settlement or payment systems, including performing node functions; as well as related activities such as finder activities and lending. “Crypto asset” is defined as any digital asset implemented using cryptographic techniques. Unfortunately, these are not exhaustive definitions. The FDIC notes that the definitions are “based on known existing or proposed crypto-related activities engaged in by FDICsupervised institutions, but given the changing nature of this area, other activities may emerge that fall within the scope” of the Crypto FIL. Risks The FDIC highlighted significant risks of crypto-related activities, including safety and soundness, financial stability, and consumer protection. The FDIC further acknowledged that other significant risks may be associated with specific crypto-related activities. Safety and soundness The innovative and largely unregulated nature of cryptoactivities makes their integration into bank services offerings extremely challenging. With respect to offering crypto-asset account services, the FDIC is concerned about a broad range wvbankers.org 32 West Virginia Banker
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