US agencies recommend old risk management principles for crypto liquidity

In a joint statement released by three federal agencies in the United States, the banking sector was advised not to create new risk management principles to combat liquidity risks stemming from cryptocurrency market vulnerabilities.

Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) release A statement reminding banks to apply existing risk management principles when dealing with crypto-related liquidity risks.

The joint statement highlighted the major liquidity risks associated with banking organizations’ crypto assets and related participants. The risks highlighted relate to the unpredictability of the size and timing of deposit inflows and outflows.

In other words, federal agencies have expressed concern about the event that a large sale or purchase could adversely affect asset liquidity, resulting in losses for investors.

Federal agencies specifically highlighted two instances that demonstrate the liquidity risks associated with cryptocurrencies.

1. Deposits made by crypto-asset-related entities for customers (end customers) of crypto-asset-related entities.
2. Deposits that constitute stablecoin-related reserves.

First and foremost, price stability depends on investor behavior and can be affected by stress, market volatility and related vulnerabilities in the crypto sector. The second type of risk is related to stablecoin demand. The joint statement read:

Such deposits may be susceptible to large and rapid outflows resulting from, for example, unexpected stablecoin redemptions or turmoil in the cryptocurrency market.

The Trio agreed that no banking organization shall be prohibited or prevented from providing banking services in accordance with local laws, but will actively monitor liquidity risks and We recommended establishing and maintaining effective risk management and controls over our offerings.

These bodies recommend four key practices for effective risk management for banks. This includes performing robust due diligence and monitoring of crypto assets, incorporating liquidity risk, assessing interconnectivity between crypto assets, and understanding the direct and indirect drivers of potential deposit behavior. will be

Related: A Cautious Approach: U.S. Banking Regulators Warn About Cryptocurrencies

On January 3, the same three federal agencies the Federal Reserve (Fed), FDIC and OCC issued a joint statement highlighting eight risks to cryptosystems, including issues such as fraud, volatility and contagion. .

The agencies jointly stated:

It is important that risks associated with the crypto sector that cannot be mitigated or controlled do not migrate into the banking system.

The statement highlighted the possibility of changing crypto regulations, citing the institutions case-by-case approach to date.