Mark Mangano is Counsel with Jackson Kelly, PLLC. Mark is a former community bank CEO and owner. He focuses his practice on assisting clients with strategic planning, corporate governance, banking regulation, vendor management, and mergers and acquisitions. Contact Mark at 304-670-0441 or mark.mangano@jacksonkelly.com. of operational risk issues, including liquidity, market, pricing, anti-money laundering, information security, information privacy, and technological reliability risks. For those banks considering extending credit reliant on crypto-assets, the FDIC raises a host of concerns. Some concerns relate to assessing the asset’s structure, quality, credit risk, value, and liquidity. The FDIC also notes that accounting, auditing, and financial reporting related to crypto-assets are evolving. Additional risks include confirming asset ownership and lien perfection. Financial Stability The FDIC expressed concern regarding two separate threats to financial system stability. First, the FDIC is concerned that crypto market events such as runs on crypto assets could destabilize banks connected with those markets. Second, the FDIC is concerned that bank operational failures could destabilize individual institutions. Consumer Protection A significant appeal of many cryptocurrencies is their unregulated and often speculative nature. The FDIC expressed concern regarding how banks can offer cryptocurrency products while ensuring consumers do not confuse the risks related to such products with the protections and insurance associated with deposit products and services. Exposure to claims about unfair or deceptive acts or practices related to crypto-related activities is of particular concern. Notification The FDIC directs banks to promptly notify their FDIC Regional Director if they engage in or plan to engage in crypto-related activity. The notice should include a description of the activity and the proposed timeline for engaging in the activity. In response, the FDIC may request information to assess the safety and soundness, financial stability, and consumer protection considerations related to the proposed activity. The burden will be on banks to demonstrate their ability to conduct crypto-related activities in a safe and sound manner. Compliance Recommendations If we assume that the Crypto FIL applies strictly to activities involving cryptocurrencies, it would seem easy to identify The FDIC expressed concern regarding how banks can offer cryptocurrency products while ensuring consumers do not confuse the risks related to such products with the protections and insurance associated with deposit products and services. when a bank needs to notify the FDIC. However, the “crypto-related activities” definition is somewhat vague and subject to continuous expansion. Many activities that are not strictly related to cryptocurrencies will likely come under the notice requirement, such as dealing with nonfungible tokens, Metaverse properties, distributed ledger activities, or smart contracts. As banks continue to work with Fintech partners to expand their service options and streamline their operations, they may find themselves engaging in cryptorelated activities. To ensure compliance with the Crypto FIL, bankers should take two steps. First, bankers should understand and keep abreast of developments related to cryptocurrency, blockchain, distributed ledger technology, and cryptoassets. Second, bankers should ensure that their vendor management process includes detailed questions about whether and how technology vendors use technologies or processes that could be considered crypto-related activities. Many of the technology innovations backing cryptocurrencies promise benefits for financial institutions. The challenge will be safely and intentionally integrating them into the bank’s existing operating models. 1https://coinmarketcap.com/historical/20220605/ 2https://explodingtopics.com/blog/blockchain-stats 3https://assets-global.website-files. com/614e11536f66309636c98688/61e19d5fed306648a6a13991_NYDIG%20 2021%20Year%20Review.pdf 4https://www.fdic.gov/news/financial-institution-letters/2022/fil22016.html Pub. 13 2022 I Issue 2 Summer 33 West Virginia Banker
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