In a joint statement issued by three United States federal agencies, the banking sector was advised not to create new risk management principles to face liquidity risks arising from the vulnerability of the crypto asset market.
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) released statement reminding banks to apply existing risk management policies when dealing with cryptocurrency-related liquidity risks.
The joint statement highlighted key liquidity risks associated with crypto-assets and related participants for banking organizations. The risks highlighted relate to the unpredictable scale and timing of deposit inflows and outflows.
In other words, federal agencies have expressed concern about an event where massive sales or purchases would negatively affect the asset’s liquidity—which could cause losses to investors.
Federal agencies specifically highlighted two cases to demonstrate the liquidity risks associated with cryptocurrencies:
- Deposits placed by the crypto-asset-related entity for the benefit of the crypto-asset-related entity’s customers (end customers).
- Deposits that form reserves related to stablecoins.
First and foremost, price stability depends on investor behavior, which can be affected by “stress, market volatility and related vulnerabilities in the crypto-asset sector.” The second type of risk is related to the demand for stablecoins. The joint statement read:
“Such deposits may be susceptible to large and rapid outflows stemming from, for example, unexpected buybacks of stablecoins or dislocations in cryptoasset markets.”
While the trio agreed that “banking organizations are not prohibited or discouraged from providing banking services” under the country’s laws, they recommended actively monitoring liquidity risks and establishing and maintaining effective risk management and controls over cryptocurrency offerings.
The agencies recommended four key practices for banks to effectively manage risk, which include conducting robust due diligence and monitoring of crypto assets, incorporating liquidity risks, assessing the interconnectedness of cryptocurrency offerings, and understanding direct and indirect drivers of potential deposit behavior.
Related: Tread with caution: US banking regulator’s warning on cryptocurrencies
On January 3, the same three federal agencies—the Fed, the FDIC, and the OCC—issued a joint statement highlighting eight risks in the cryptosystem, including fraud, volatility, contagion and similar issues.
The agencies jointly stated:
“It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not flow into the banking system.”
The statement highlighted the possibility of change in crypto regulations, citing “case-by-case approaches by agencies to date.”