In a significant development, Top US banking regulators have gone on to issue a joint statement on warning banks of liquidity risks that are posed by crypto-asset-related entities. The Office of the Comptroller of the Currency- OCC, The Federal Deposit Insurance Corporation- FDIC as well as the Federal Reserve System- Federal Reserve have all asked banks to monitor such risks and also make sure to have efficient and effective risk management practises in place.
As per the agencies, the statement issued does not give out new risk management principles but instead reminds the banking organisations to make use of the existing principles. According to the statement, the banking firms are neither prohibited nor discouraged from providing banking services to clients of any type or class, as it is permitted by the regulation or law.
Significantly, the regulators have gone on to warn on the deposits that are placed by the crypto-asset-related currency as well as deposits that make up for the stablecoin-related services. As per the regulators, such deposits happen to be susceptible to quick and large inflows and also outflows as and when the end customers react to the market events that are specifically in line with crypto-asset-sector-related market events, uncertainty, and media reports.
It is well to be noted that the banks are required to monitor day-in, day-out, the risks of liquidity that is associated with funding sources and to also set-up and maintain apt risk management as well as controls that happened to be in balance with the severity of those risks that come up.
It seems that the regulators issued a similar warning again in January 2023, when they told banks to watch out for scams, frauds, and legal grey areas that had to do with the custody of digital assets.
In a more recent move, the US Federal Reserve Board rejected an application that was sent by one of the banks, citing that the risk management framework of the firm was not adequate so as to mitigate the associated risk of crypto activities.