The “potential heightened liquidity risks” presented by certain sources of funding from crypto-asset-related entities is highlighted in a joint statement issued Thursday by federal banking 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 therefore may be further heightened,” according to the statement.
The Federal Deposit Insurance Corp. (FDIC), Federal Reserve and the Office of the Comptroller of the Currency (OCC) said their joint statement reminds banking organizations to apply “existing risk management principles” in their dealings with crypto firms. However, the statement does not create new risk management principles, the agencies stated.
“The joint statement highlights key liquidity risks and some effective practices to monitor and appropriately manage those risks,” the agencies asserted. However, the statement also points out that “banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation.”
Key risks outlined in the statement include:
- Deposits placed by a crypto-asset-related entity that are for the benefit of the crypto-asset-related entity’s customers (end customers). “The stability of such deposits may be driven by the behavior of the end customer or crypto-asset sector dynamics, and not solely by the crypto-asset-related entity itself, which is the banking organization’s direct counterparty,” the agencies stated. Stability of those deposits may be influenced by stress, market volatility, “and related vulnerabilities in the crypto-asset sector, which may or may not be specific to the crypto-asset-related entity,” the agencies said. “Such deposits can be susceptible to large and rapid inflows as well as outflows, when end customers react to crypto-asset-sector-related market events, media reports, and uncertainty. This uncertainty and resulting deposit volatility can be exacerbated by end customer confusion related to inaccurate or misleading representations of deposit insurance by a crypto-asset-related entity.”
- Deposits that constitute stablecoin-related reserves. “The stability of such deposits may be linked to demand for stablecoins, the confidence of stablecoin holders in the stablecoin arrangement, and the stablecoin issuer’s reserve management practices,” according to the statement. “Such deposits can be susceptible to large and rapid outflows stemming from, for example, unanticipated stablecoin redemptions or dislocations in crypto-asset markets.”
Agencies Issue Joint Statement on Liquidity Risks Resulting from Crypto-Asset Market Vulnerabilities