U.S. Federal Reserve and others warn banks handling funds in the cryptocurrency industry

Statement on “Liquidity Risk of Virtual Currency Deposits”

The US Federal Reserve (Fed) and others released a statement on the 23rd about the risks that vulnerabilities in the crypto asset (virtual currency) industry pose to the liquidity of traditional banks. He called on banks doing business with cryptocurrency companies to manage their risks.

The statement was jointly issued by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). It also notes that it does not establish new risk management principles and does not prohibit or discourage certain types of companies from providing banking services.

The Fed and others identified the following major liquidity risks that the cryptocurrency market poses to banks:

• Of the deposits deposited with a bank by a cryptocurrency-related company, deposits deposited for the customers of the cryptocurrency company
• Reserve deposits related to stablecoins

First, with regard to deposits for customers of cryptocurrency companies, their stability may be affected by events in the cryptocurrency market, media reports, and when cryptocurrency holders react to market news, sudden capital outflows such as ransoms. He said it could be affected by the influx.

He added that the risks from these uncertainties could be exacerbated if cryptocurrency companies misinformed their customers about deposit insurance.

In 2022, the US Federal Deposit Insurance Corporation (FDIC) said that multiple virtual currency exchanges had misleading explanations as if the FDIC insurance was applied to virtual currency-related financial products. I demand that it be rectified immediately.

connection: U.S. FDIC issued a cancellation notice regarding the mention of deposit insurance to five companies including FTX.US, a virtual currency exchange

Next, the Fed et al. argued that the reserve deposits of stablecoins are affected by the demand for the stablecoin, the reliability of the coin’s mechanism, and the reserve management practices of the coin issuers. Unexpected market turmoil could lead to a rapid outflow.

This point seems to be based on the events in May 2022 when the old UST, an uncollateralized stablecoin, crashed due to price divergence.

Recommend risk management

Considering the above risks, the FRB and others recommend that banks that handle funds from cryptocurrency companies monitor liquidity risk and conduct risk management according to the level of risk. As an example, the following measures are taken for deposits of virtual currency companies.

• Analyze the factors that affect deposits and also understand the extent to which deposits are subject to unpredictable market fluctuations
• Asset interrelationships of multiple cryptocurrency companies and assessment of liquidity risk associated therewith
• Incorporating deposit liquidity risk and volatility into contingency funding plans
• Rigorous risk assessment and continuous monitoring of cryptocurrency companies

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