Innovation in the field of financial services and payments tends to concentrate around two poles: FinTech and cryptocurrencies.
In its recently released 2024 annual report, the U.S. Financial Stability Oversight Council (FSOC) took pains to illustrate the risks, as well as potential benefits, of both sectors compared to the traditional banking landscape.
The convergence of cryptocurrencies, FinTechs and traditional finance represents a significant evolution in the financial ecosystem. This interconnectivity offers many benefits but also introduces complex risks.
“Market volatility in the first quarter of 2024 and operational events throughout the year have highlighted the need for banks to be financially and operationally resilient through appropriate risk management and contingency planning,” a writes the FSOC.
According to the report, although the crypto market remains relatively small compared to traditional markets, its rapid evolution and the growing role of FinTech in financial services highlight the need for future regulatory action to maintain stability and transparency .
Learn more: Crypto and FinTech cry foul over debanking – Could the real problem lie in the risk?
Crypto: a market under surveillance
The total market value of crypto assets stood at just under $2 trillion in mid-2024, significantly lower than the $48 trillion market cap of the S&P 500. Despite its modest size, the FSOC highlighted the potential risks if the crypto ecosystem becomes more interconnected with traditional financial markets – which it continues to do. Just Tuesday, December 10, Deutsche Bank signed a corporate banking agreement with Crypto.com.
The FSOC has taken particular interest in stablecoins, which remain a major area of concern due to their susceptibility to runs, market opacity, and high concentration.
A single issuer, USDT (Tether), controls around 70% of the stablecoin market value, creating systemic risk if it falters. Many stablecoin issuers, including USDT, operate beyond the federal framework, with limited transparency about their reserves and risk management practices. The FSOC has warned that this lack of accountability increases the risk of fraud and market disruption.
In its report, the FSOC proposed several actions to mitigate risks in the crypto sector, including stablecoin legislation; authority over the spot market for crypto-assets that do not qualify as securities; monitoring of crypto-asset entities and subsidiaries; and continued efforts to educate consumers about the risks associated with cryptocurrencies, stablecoins and other digital assets.
Learn more: Banks Eye Stablecoins to Accelerate Cross-Border Innovation
FinTech: a network of increasing complexity
PYMNTS explained Tuesday how, while a wave of funding rounds in recent months gives rival banks new financial firepower to position themselves as alternatives to traditional banks, challenges abound across the landscape as agencies surveillance and agencies continue to sharpen their gaze on FinTechs, in particular. bank-FinTech relationships and the risks associated with these partnerships.
According to the FSOC report, the bankruptcy of FinTech intermediary Synapse in May highlighted the operational risks involved in banks’ partnerships with FinTechs. While these collaborations can enhance innovation, they also increase the complexity of risk management.
Accordingly, the FSOC supports the ongoing work of the Cloud Executive Steering Group (CESG) to analyze and address the risks posed by third-party services to the financial system.
Regarding FinTech-bank partnerships, the Council also recommended that Congress pass legislation ensuring that the FHFA, NCUA, and other relevant agencies have adequate review and enforcement powers to supervise third-party service providers that interact with their regulated entities.
Ultimately, the “so what” of the FSOC report lies in its clear warning: crypto and FinTech are emerging forces in the financial ecosystem that could pose systemic risks if left unchecked. The report signals a pivotal moment where regulatory clarity and proactive oversight have become not just good practice but a necessity.
According to the council, regulatory inaction risks letting these innovations become threats to the broader financial system rather than tools for its progress.
