In a joint statement released by three United States federal agencies, the banking sector is advised not to create new risk management principles to combat liquidity risks resulting from the vulnerability of the crypto asset market.
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 statements reminding banks to apply existing risk management principles when dealing with crypto-related liquidity risks.
The joint statement highlights the main liquidity risks associated with crypto-assets and related participants for banking organizations. The risks highlighted are the unpredictable scale and timing of deposit inflows and outflows.
In other words, the federal agency expressed concern about events where large sales or purchases would have a negative impact on the liquidity of the asset – potentially leading to losses for investors.
The federal agency specifically highlighted two examples to present the liquidity risk associated with cryptocurrencies:
- Deposits placed by crypto-asset-related entities for the benefit of the crypto-asset-related entity’s customers (end customers).
- A deposit that is a reserve associated with a stablecoin.
Initially, price stability depends on investor behavior, which can be influenced 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 can be vulnerable to large and rapid outflows arising from, for example, unanticipated stablecoin redemptions or dislocations in the crypto-asset market.”
While the trio agreed that “banking organizations are not prohibited or discouraged from providing banking services” under state law, it is recommended to actively monitor liquidity risks and establish and maintain effective risk management and control over crypto offerings.
The agency recommends four main practices for effective risk management for banks, which include conducting due diligence and monitoring crypto assets, integrating liquidity risks, evaluating the interconnectedness between crypto offerings and understanding the direct and indirect drivers of the potential behavior of deposits.
related: Approach with caution: US banking regulator’s crypto warning
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 problems.
The agencies jointly stated:
“It is important that the risks associated with the crypto-asset sector that cannot be mitigated or controlled do not transfer to the banking system.”
The statement highlighted the possibility of changing crypto regulation with reference to the agency’s “case-by-case approach” so far.