The Fed guides banks in dealing with crypto liquidity crises
The three major branches of the federal government that regulate US banks are urging lenders to brush up on their risk management practices for handling cryptocurrency assets.
The move comes as traditional financial institutions such as S&P 500 component Signature Bank
SBNY
has handled billions in customer withdrawals in the wake of the bankruptcy of crypto company FTX last year and in a climate of volatility in digital asset prices.
“Certain sources of funding from crypto-related entities may pose increased liquidity risk to banking organizations due to the unpredictability of the volume and timing of deposit inflows and outflows,” Federal Reserve System, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency said in a joint statement issued Thursday.
The regulators zeroed in on deposits placed by a crypto-asset-related entity that benefit the crypto-entity’s end customers.
“The stability of such deposits may be driven by the behavior of the end customer or the dynamics of the crypto-asset sector, and not only by the crypto-asset-related entity itself, which is the banking organization’s direct counterparty,” the statement said.
Regulators warned that risk could be further increased by concentrations of deposit funding bases in crypto-asset-related entities that are highly interconnected or share similar risk profiles.
Banks already have risk management rules and practices in place to address these issues.
The Fed highlighted some ways to address these issues, including understanding the direct and indirect drivers of the potential behavior of deposits from cryptoasset-related entities and the extent to which those deposits are subject to unpredictable volatility.
The regulators also encouraged banks to consider potential concentration or correlation across deposits from crypto-asset-related entities and associated liquidity risk, and to incorporate liquidity risk or funding volatility into contingency funding planning.
The Fed also recommended that banks conduct “robust” due diligence and ongoing monitoring of crypto-asset-related entities that establish deposit accounts, including reviewing representations made by crypto-asset-related entities to their end customers about deposit accounts.
The comments from federal banking regulators follow a series of regulatory moves around crypto by the US Securities and Exchange Commission.
Earlier this month, the SEC accused Terraform Labs and its CEO, Do Kwon, of defrauding crypto investors and cracking down on crypto exchanges, including Kraken, which allegedly failed to register its crypto staking program earlier this month.
In January, the SEC also hit two crypto exchanges, Gemini and Genesis Global Capital, with charges related to unregistered securities.
Also read: Crypto regulation looms, but bitcoin rises. Here’s why.
