Digital Asset – Risk Review

The distribution and acceptance of digital assets continues to grow.

Banks, trust companies, financial technology companies (fintechs), and other financial institutions have started to accept digital assets, including cryptocurrencies, as legal tender and to custody those assets for their customers. As digital assets become more prevalent, customers are looking for financial institution partners that can accept the digital currencies that they receive or would like to receive from their customers. This will put continuing pressure on financial institutions to compete in the digital currency space.

Central banks also have started to accept cryptocurrencies as part of their national monetary policies. However, the discussion of the risks and the risk management processes to be applied by a financial institution beyond pure compliance considerations (e.g., Bank Secrecy Act/anti-money laundering) have lagged behind the acceptance.

Regulators have begun to pay more attention to the risks associated with digital currencies, but the supervisory process is in its nascent stages. The Securities and Exchange Commission (SEC) has implemented a digital asset framework. Earlier this year, the FDIC issued a request for information (RFI) seeking input on the current and potential use cases of digital assets and digital asset technologies. The comment period for this RFI closed in July. While we wait for the output or reaction to the comments that the FDIC received, banks should assess the risk associated with digital assets and ensure that they have the appropriate infrastructure to manage those risks.