Fed Focuses More on Crypto, Alerts Banks to Liquidity Risk

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Continuing its heightened scrutiny of the cryptocurrency industry, the US Federal Reserve issued a new statement on Thursday reminding banks of the risks inherent in trading cryptocurrency and related assets.

Some sources of funding from crypto-asset-related entities may pose heightened liquidity risks to banking organizations due to the unpredictability of the magnitude and timing of deposit inflows and outflows, the statement said.

Agencies joining the Federal Reserve in its crypto banking warning are the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC).

The Federal Reserve pointed to volatility in cryptocurrency markets, the risk of bank runs and, as in the case of Terra USD (UST), stablecoins decoupling from the dollar or periods of dislocation “of stress and panic. customers due to market events, media reports and uncertainty.

The stability of these deposits may be related to the demand for stablecoins, the confidence of stablecoin holders in the stablecoin agreement, and the reserve management practices of stablecoin issuers, the agency wrote.

The group also advised banks to be on the lookout for crypto companies that inaccurately or misrepresent their deposit insurance status.

In July 2022, the FDIC opened an investigation into the insurance claims of bankrupt crypto broker Voyager Digitals. The agency accused the Toronto-based crypto firm of marketing all depositors covered by FDIC insurance through its partnership with Metropolitan Commercial Bank, Voyagers’ banking partner. But the FDIC said only the Metropolitan Commercial Bank was insured, not Voyager.

On the other hand, the collective warning also seemed to point out that crypto trading does not require an entirely separate checklist from traditional finance.

The statement reminds banking organizations to apply existing risk management principles, it does not create new risk management principles, the Fed wrote. Banking organizations are neither prohibited nor discouraged from providing banking services to customers of a specific category or type, to the extent permitted by law or regulation.

Last month, US Senator Elizabeth Warren chastised banking regulators for not doing enough to protect consumers from crypto fraud, targeting crypto-friendly banks like Silvergate, which Warren accused of opening up the banking system to more great risk of crypto meltdown.

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