US Regulators Increase Scrutiny, Warn Banks over Crypto-Related Liquidity Risks


On Thursday, The Federal Reserve and other US banking
agencies (including the Office of the Comptroller of the Currency and the
Federal Deposit Insurance Corporation) reminded
banks of the risks of dealing with crypto assets.
The federal agencies warned banks that cryptocurrency poses
significant liquidity dangers. A joint statement issued on Thursday stated: “Certain
sources of funding from crypto-asset-related entities may pose heightened
liquidity risks to banking organizations due to the unpredictability of the
scale and timing of deposit inflows and outflows.”
The agencies’ joint statement said crypto firms’ bank
deposits could be unstable and driven by customers’ reactions to crypto
industry-related market events, media reports, and uncertainty.
The regulators flagged out stablecoin reserves deposited at
banks as susceptible to volatility during stressful conditions in crypto-asset
markets, stablecoins de-pegging from the dollar, unanticipated stablecoin withdrawals,
and the risk of bank runs triggered by fears that some digital asset firms primed
to go into insolvency like the case of FTX fallout and TerraUSD crash.
The regulators advised banks to monitor and assess risks if
they engage with crypto clients, especially to be on the lookout for crypto
firms that inaccurately represent or mislead about their deposit insurance
status.
Will crypto-friendly banks
give up?
Since Sam Bankman-Fried’s FTX exchange collapsed, banking
regulators have raised concerns about banks’ involvement with crypto clients.
Last month, the three major banking regulators warned
banks that they were concerned about their ties with crypto customers.
The regulators have continued imposing crackdowns on crypto
businesses. While the digital asset sector often pitched itself as an alternative
to banks, these companies still rely heavily on banks to link up with a financial
system that runs on fiat currencies like euros and dollars.
Cryptocurrency is a major long-term disruptor. Financial
services companies, banks, and regulators are all aware
of this.
Even after wild fluctuations that saw crypto prices drop by
more than 50% from their all-time highs in 2021, the market maintained high
valuations.
But given risks, speculation, and regulatory concerns, many financial
institutions still hesitate to offer users cryptocurrency services.

Nicholas Otieno
CBW - External Analyst
KENYA