Fed increases focus on crypto, banks warn of liquidity risk

Continuing its heightened scrutiny of the cryptocurrency industry, the U.S. Federal Reserve issued a new statement Thursday reminding banks of the risks associated with trading cryptocurrencies and related assets.

“Certain sources of funding from crypto-asset-related entities may pose increased liquidity risk to banking organizations due to the unpredictability of the volume and timing of deposit inflows and outflows,” the statement said.

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

The Federal Reserve highlighted cryptocurrency market volatility, the risk of bank runs and – as in the case of Terra USD (UST), stablecoins that decouple from the dollar or “dislocation” – periods of stress and customer panic due to market events, media reports and uncertainty.

“The stability of such deposits may be related to the demand for stablecoins, the confidence of stablecoin holders in the stablecoin arrangement, and the stablecoin issuer’s reserve management practices,” 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 bankrupt crypto broker Voyager Digital’s insurance claims. The agency accused the Toronto-based crypto firm of promoting all depositors covered by FDIC insurance through its partnership with Metropolitan Commercial Bank, Voyager’s banking partner. But the FDIC said only Metropolitan Commercial Bank was insured, not Voyager.

On the other hand, the collective warning also seemed to emphasize that trading crypto does not require an entirely separate list of controls than 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 any particular class or type, as permitted by law or regulation.”

Last month, US Senator Elizabeth Warren chastised banking regulators for not doing enough to protect consumers from crypto scams, taking aim at “crypto-friendly” banks such as Silvergate, which Warren accused of opening up the banking system to the greater risk of a “crypto”. collapse.”