While the U.S. administration and its regulators are wholeheartedly embracing the emerging crypto sector, U.S. banks that ramp up their involvement with crypto face growing risks, warns Fitch Ratings.
In a new report, the rating agency said that while banks that are becoming more involved with crypto may be able to boost fee revenues and enhance efficiency, they are also taking on added reputational, liquidity, operational, and compliance risks — even when their involvement is limited to lower-risk businesses, such as providing custody services and cash management.
This year, the regulatory pendulum in the U.S. “has swung decisively toward acceptance of digital assets,” Fitch noted — freeing up banks to offer crypto custody, stablecoin issuance, and blockchain-based services without securing prior regulatory approval.
Additionally, new legislation is due to take effect in January that could broaden the adoption of stablecoins.
Against that backdrop, several major financial institutions — including JPMorgan Chase, Bank of America, Citigroup and Wells Fargo — have launched digital asset initiatives, and crypto firms are also seeking federal trust bank charters, it noted.
While these developments may provide banks with the opportunity to innovate, Fitch said that it “may negatively reassess the business models or risk profiles of U.S. banks with concentrated digital asset exposures.”
Indeed, the rating agency sees growing risks associated with banks increased crypto exposure.
Even as the new legislation aims to provide a regulatory framework for banks’ involvement in the digital asset ecosystem, banks themselves still “need to adequately address challenges around the volatility of cryptocurrency values, the pseudonymity of digital asset owners, and the protection of digital assets from loss or theft to adequately realize the earnings and franchise benefits,” it said.
Moreover, risks to the overall financial system could also increase, if the adoption of stablecoins expands to a level that impacts the existing U.S. Treasury market, it also warned.