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US Federal Agencies Advise Banks on Crypto Liquidity Risks Management

The Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued a joint statement advising the banking sector on managing liquidity risks resulting from crypto-asset market vulnerabilities.

Cryptocurrencys logos
Cryptocurrencys logos

Key Liquidity Risks Highlighted

The statement highlighted the key liquidity risks associated with crypto-assets and related participants for banking organizations, including the unpredictable scale and timing of deposit inflows and outflows. The federal agencies raised concerns about the potential negative impact on asset liquidity from massive selloffs or purchases.

Two Types of Liquidity Risks

The federal agencies specifically highlighted two instances to showcase the liquidity risks associated with cryptocurrencies:

  1. Deposits placed by a crypto-asset-related entity for the benefit of end customers.
  2. Deposits that constitute stablecoin-related reserves.

Effective Risk Management Recommendations

The agencies recommended four key practices for effective risk management, including performing robust due diligence and monitoring of crypto assets, incorporating liquidity risks, assessing interconnectedness between crypto offerings, and understanding deposit behavior's direct and indirect drivers.

The agencies emphasized that while banking organizations are not prohibited from providing banking services, they should actively monitor the liquidity risks and establish effective risk management and controls over crypto offerings.

Previous Joint Statement on Crypto Risks

On Jan. 3, the same three federal agencies issued a joint statement highlighting eight risks in the cryptosystem, including fraud, volatility, contagion, and similar issues. The agencies emphasized that it is important that risks related to the crypto-asset sector do not migrate to the banking system. The statement highlighted the possibility of changing crypto regulations with references to agencies' "case-by-case approaches to date."