US Authorities Alert Banks About Crypto Liquidity dangers
- Federal bank regulatory bodies released a joint statement outlining the liquidity risks to banking institutions linked to specific financing sources from entities involved with crypto assets.
- The statement urges financial institutions to follow current risk management guidelines.
- It does not develop any new concepts for risk management.
In a collaborative statement released on Thursday morning, the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency urged banks to exercise caution when evaluating run risks associated with deposits from cryptocurrency companies.
According to the regulators, the statement does not develop new “risk management principles.”
The regulators also used stablecoin reserve deposits and deposits made by cryptocurrency platforms for the advantage of their users as examples of how unpredictable deposit inflows and outflows can be.
Banks are neither forbidden nor deterred from providing banking services to customers of any particular class or type, as allowed by legislation or regulation, the Fed, FDIC, and OCC emphasised in a statement they published last month. The declaration does not, however, specify what is or is not permitted or under what circumstances.
The regulators jointly outlined important liquidity risks related to cryptoassets and players in the cryptoasset sector that banks should be mindful of.
The first would be deposits made by a crypto asset-related business to the advantage of the crypto asset-related entity’s clients (end customers). The regulators are urging banks under their control to actively monitor and evaluate risk if they are involved in cryptocurrency activity.
The reliability of such deposits, according to the regulators, may be influenced by end-user behaviour or the dynamics of the cryptoasset sector, rather than just by the cryptoasset-related company that serves as the banking organization’s immediate counterparty.
The regulatory chase of the cryptocurrency industry has been the major news story of the past few weeks. The US Securities and Exchange Commission (SEC) has taken the lead in resolving complaints brought forth by organisations like Kraken and Paxos.
Sen. Sherrod Brown (D-Ohio), the chairman of the Senate Banking Committee, believes, This is the correct approach to offer greater guidance to banking organisations and safeguard people’s hard-earned money. This approach will be an important step as regulators continue to develop a robust legislative framework for digital assets.