US banking regulators warn banks about crypto-liquidity risks
The Federal Reserve and other US banking agencies are warning banks that crypto poses significant liquidity risks, according to a joint statement issued on Thursday, further reinforcing their campaign to generally steer lenders away from digital assets.
While the agencies—which also included the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) – insists that it is not illegal for US banks to engage in cryptocurrency activities, the latest in a series of formal cautionary statements makes it clear that any lender dealing with crypto will have a lot of explaining to do to their regulators.
The agencies’ joint statement points out that crypto firms’ bank deposits can be volatile and driven by “dynamics in the crypto-asset sector”, even if the company itself is stable.
“Such deposits may be susceptible to large and rapid inflows as well as outflows as end customers react to market events related to crypto-asset sectors, media reports and uncertainty,” said the regulator, which also specifically flagged stablecoin reserves deposited in banks. , which they said could be volatile during “unexpected stablecoin redemptions or shifts in cryptoasset markets.”
US regulators had already formally warned the banking industry about significant involvement in virtual currencies, arguing that banks that rely on crypto activity as a significant part of their business will face increased scrutiny over safety and soundness concerns. Thursday’s statement reminded the banks that such a concentration is on the minds of the agencies.
“When a banking organization’s deposit funding base is concentrated in crypto-asset-related entities that are highly interconnected or share similar risk profiles, deposit fluctuations may also be correlated, and liquidity risk may therefore be further increased,” it said.
The regulators advise the banks they supervise to spend significant effort actively monitoring and assessing risk if they are engaged in crypto activity.
“This is the right step to bring more clarity to banking organizations and protect people’s hard-earned money as we continue to consider a comprehensive digital asset regulatory framework,” said Senate President Sherrod Brown (D-Ohio). The Banking Committee, in a statement responding to the regulators’ warning.
UPDATE (February 23, 2023, 17:51 UTC): Adding comment from Senator Sherrod Brown.
