US Agencies issue statement cautioning Banking sector on crypto-asset liquidity issues

Share IT

Key takeaways:

  • The joint declaration focused on the significant liquidity risks that cryptoassets and associated participants pose to banking organizations.
  • Deposits made by a company connected to cryptocurrencies for the advantage of their clients

Three government agencies in the United States issued a joint statement that cautioned the banking industry against establishing new risk management guidelines to address liquidity risks brought on by crypto-asset market weaknesses.

In a statement, the Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) urged banks to follow current risk management guidelines when handling liquidity risks associated with cryptocurrencies.

The joint statement emphasized banking organizations and the main liquidity risks connected to cryptoassets and related participants. The dangers mentioned are related to the unpredictability of deposit inflows and outflows in terms of size and timing.

In other words, the federal agencies expressed concern about a scenario in which large-scale purchases or sales would adversely affect the asset’s liquidity and possibly result in investor losses.

The federal agencies singled out two cases in particular to illustrate the liquidity risks connected to cryptocurrencies:

  • Deposits made by a company connected to cryptocurrencies for the advantage of their end clients.
  • Deposits that makeup reserves linked to stablecoin.

The behavior of investors, which can be influenced by “stress, market volatility, and related vulnerabilities in the crypto-asset industry,” is what determines the price stability in the first place. The desire for stablecoins is a factor in the second category of risk. The joint document states:

“Such deposits can be susceptible to large and rapid outflows stemming from, for example, unanticipated stablecoin redemptions or dislocations in crypto-asset markets.”

The group advised active monitoring of the liquidity risks and setting up and maintaining effective risk management and controls over crypto offerings, even though it was agreed that banking organizations are neither discouraged from providing banking services nor prohibited by the law from doing so.

The four essential practices that the agencies advised banks to follow for effective risk management include conducting thorough due diligence and monitoring of cryptocurrency assets, factoring in liquidity risks, evaluating interconnectedness between crypto offerings, and comprehending the direct and indirect drivers of potential deposit behavior.

With references to agencies’ “case-by-case approaches to date,” the statement emphasized the potential for changing crypto regulations.

Share IT

Get Daily Updates

Crypto News, NFTs and Market Updates

Can’t find what you’re looking for? Type below and hit enter!