Fitch Ratings has issued a cautionary note regarding US banks with substantial cryptocurrency exposure, suggesting a possible negative reassessment of their credit ratings. In a report released on Sunday, the agency acknowledged that while integrating cryptocurrencies can enhance fees, yields, and operational efficiency, it also introduces significant risks related to reputation, liquidity, operations, and compliance. Fitch noted that innovations such as stablecoin issuance, deposit tokenization, and the use of blockchain technology present banks with opportunities to enhance customer service and capitalize on the efficiency of blockchain in areas like payments and smart contracts. However, the agency warned that banks with concentrated digital asset exposures might see their business models or risk profiles downgraded.
Despite regulatory progress in the US aimed at creating a safer cryptocurrency landscape, banks still confront numerous challenges in managing cryptocurrency dealings. Fitch pointed out that banks must effectively address issues concerning the volatility of cryptocurrency values, the pseudonymity of digital asset owners, and safeguarding digital assets against loss or theft to fully harness the potential earnings and franchise benefits.
Fitch Ratings is part of the "Big Three" credit rating agencies in the US, alongside Moody’s and S&P Global Ratings. The ratings from these agencies are influential in the financial sector, affecting business perceptions and economic viability. A downgrade from Fitch for banks with significant crypto exposure could lead to diminished investor confidence, increased borrowing costs, and hindered growth prospects. Major banks like JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, which have ventured into the crypto space, were mentioned in the report.
The report also underscored potential risks from the rapid expansion of the stablecoin market, which could pose systemic threats if it grows sufficiently to impact other financial sectors and institutions. Fitch warned that widespread adoption of stablecoins might increase risks to the financial system, particularly if it reaches a scale capable of influencing the Treasury market.
In a similar vein, Moody’s recently highlighted the potential systemic risks associated with stablecoins. In a report from late September, Moody’s argued that the widespread use of stablecoins in the US could undermine the legitimacy of the US dollar. They noted that a high penetration of USD-linked stablecoins could weaken monetary transmission, especially when pricing and settlement occur increasingly outside the domestic currency framework. This situation, they said, could lead to "cryptoization" pressures, which resemble unofficial dollarization but with increased opacity and reduced regulatory oversight.