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

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Nicholas Otieno Follow


Feb, 24 2023

Feb, 24 2023

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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. 

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Nicholas Otieno

CBW - External Analyst


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