US agencies recommend old risk management principles for crypto liquidity

In a associated connection released by 3 United States national agencies, the banking assemblage was advised against creating caller hazard absorption principles to antagonistic liquidity risks resulting from crypto-asset marketplace vulnerabilities.

The Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) released a connection reminding banks to use existing hazard absorption principles erstwhile addressing crypto-related liquidity risks.

The associated connection highlighted the cardinal liquidity risks associated with crypto-assets and related participants for banking organizations. The risks highlighted interest the unpredictable standard and timing of deposit inflows and outflows.

In different words, the national agencies raised concerns astir an lawsuit wherever monolithic selloffs oregon purchases would negatively interaction the liquidity of the plus — perchance incurring losses for investors.

The national agencies specifically highlighted 2 instances to showcase the liquidity risks associated with cryptocurrencies:

1. Deposits placed by a crypto-asset-related entity for the payment of the crypto-asset-related entity’s customers (end customers). 
2. Deposits that represent stablecoin-related reserves.

In the archetypal instance, the terms stableness depends connected the investors’ behavior, which tin beryllium influenced by “stress, marketplace volatility and related vulnerabilities successful the crypto-asset sector.” The 2nd benignant of hazard is related to the request for stablecoins. The associated connection read:

“Such deposits tin beryllium susceptible to ample and accelerated outflows stemming from, for example, unanticipated stablecoin redemptions oregon dislocations successful crypto-asset markets.”

While the trio agreed that “banking organizations are neither prohibited nor discouraged from providing banking services” arsenic per the instrumentality of the land, it recommended progressive monitoring of the liquidity risks and establishing and maintaining effectual hazard absorption and controls implicit crypto offerings.

The agencies recommended 4 cardinal practices for effectual hazard absorption to banks, which see performing robust owed diligence and monitoring of crypto assets, incorporating the liquidity risks, assessing interconnectedness betwixt crypto offerings and knowing the nonstop and indirect drivers of the imaginable behaviour of deposits.

Related: Approach with caution: US banking regulator’s crypto warning

On Jan. 3, the aforesaid 3 national agencies — the Fed, FDIC and OCC — issued a associated connection highlighting 8 risks successful the cryptosystem, including fraud, volatility, contagion and akin issues.

The agencies jointly stated:

“It is important that risks related to the crypto-asset assemblage that cannot beryllium mitigated oregon controlled bash not migrate to the banking system.”

The connection highlighted the anticipation of changing crypto regulations with references to agencies’ “case-by-case approaches to date.”