The FDIC is warning banks about crypto risk and wants firms to notify the regulator about their activities in the space

• The FDIC in a letter to banks Thursday flagged risks surrounding crypto-related activity.
• The regulator wants banks to notify it of their current or planned crypto-related activities.

The Federal Deposit Insurance Corporation flagged concerns about crypto in a letter to banks that also included a request to be notified about any business they are conducting with digital assets.

"FDIC is concerned that crypto assets and crypto-related activities are rapidly evolving, and risks of this area are not well understood given the limited experience with these new activities," the agency said in a letter published Thursday. The FDIC provides insurance to banks and ensures that depositors don't lose money if a bank fails.

The regulator said it wants the institutions it supervises to notify it about their crypto-related activities or about any plans to engage in digital assets. It will use the information to assess the safety and soundness, consumer protection, and financial stability implications of such activities.

Under safety and soundness, the FDIC said there are fundamental crypto-ownership issues, including whether it is possible for ownership to be clearly validated and confirmed. "Further, there are significant anti-money laundering/countering the financing of terrorism implications and concerns related to crypto assets," it added.

In terms of financial stability, one risk the agency raised is a systematic disruption in transactions that could result in a "run" on financial assets that back a crypto asset or crypto-related activity.

The agency also wants to avoid consumer confusion over crypto assets offered by, through, or in connection with insured institutions. Consumers "may not understand the role of the bank or the speculative nature of certain crypto assets as compared to traditional banking products, such as deposit accounts."

The FDIC's letter arrived as US regulatory agencies are working on unifying oversight of the $2 trillion cryptocurrency market. President Joe Biden in March signed an executive order for further work on developing a national policy on digital currencies.