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NextGen Magazine

 
 

Regulators Warn Banks of Liquidity Risks in Crypto-Related Deposits

By:
S.J. Steinhardt
Published Date:
Feb 23, 2023

Banking organizations should apply existing risk management principles when dealing with deposits linked to crypto entities, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) stated jointly.

The regulators cited “certain sources of funding from crypto-asset-related entities [that] may pose heightened liquidity risks to banking organizations due to the unpredictability of the scale and timing of deposit inflows and outflows.” They included deposits placed by a crypto-asset-related entity that are for the benefit of the crypto-asset-related entity’s customers and deposits that constitute stablecoin-related reserves.

The agencies recommended that banking organizations maintain risk management practices that could include:

● Understanding the direct and indirect drivers of potential behavior of deposits from crypto-asset-related entities and the extent to which those deposits are susceptible to unpredictable volatility;

● Assessing potential concentration or interconnectedness across deposits from crypto-asset-related entities and the associated liquidity risks;

● Incorporating the liquidity risks or funding volatility associated with crypto-asset-related deposits into contingency funding planning, including liquidity stress testingand, as appropriate, other asset-liability governance and risk management processes; and

● Performing robust due diligence and ongoing monitoring of crypto-asset-relatedentities that establish deposit accounts, including assessing the representations madeby those crypto-asset-related entities to their end customers about such depositaccounts that, if inaccurate, could lead to rapid outflows of such deposits.

Earlier this year, the three agencies issued a joint statement on crypto-asset risks to banking organizations. In it, they said that “issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices.”