US regulators and the Federal Reserve have issued a joint warning about the major liquidity risks associated with crypto assets. However, The regulators clarified that banks “are not prohibited or discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation.”
US Regulators Issue Joint Statement on Crypto
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) jointly issued a statement on cryptocurrencies on Thursday.
The Federal Reserve, FDIC, and OCC explained that their statement “highlights key liquidity risks associated with crypto assets and crypto asset sector participants that banking organizations need to be aware of.” They warned:
In particular, certain sources of funding from crypto-asset-related entities may pose increased liquidity risks for banking organizations due to the unpredictability of the scale and timing of deposit inflows and outflows.
For example, the stability of crypto-entities’ deposits for the benefit of their clients may be driven by “end-customer behavior or crypto-asset industry dynamics, and not solely by the crypto-asset-related entity itself, which is the direct counterparty of the banking organization,” the regulators warned. “Such deposits may be susceptible to large and rapid inflows, as well as outflows, as end-customers react to crypto-asset-related market events, media reports, and uncertainty.”
Another example is deposits that “constitute stablecoin-related reserves,” which may be “susceptible to large and rapid outflows,” including from “unforeseen stablecoin swaps or dislocations in crypto-asset markets,” the regulators detailed.
Banking organizations that use funding sources from crypto entities should actively monitor liquidity risks and establish effective risk management and controls, the Federal Reserve, FDIC and OCC advised. While emphasizing that banking organizations should apply existing risk management principles to cryptocurrencies, the regulators clarified:
Banking organizations are not prohibited or discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation.
The Fed, FDIC, and OCC also issued a joint warning about the risks of cryptocurrencies in January. Regulators cited fraud, scams, legal uncertainties, inaccurate or misleading representations by crypto companies, significant volatility in crypto markets, execution risks, and contagion risks.
What do you think about the joint warning on cryptocurrencies from the Federal Reserve, the FDIC and the OCC? Let us know in the comments section.
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