Regulators issue crypto liquidity warnings to banks

Banks serving the crypto industry should incorporate liquidity risks and funding volatility into stress tests and governance and risk management processes, according to a Feb. 23 joint statement from the Federal Reserve, FDIC and Office of the Comptroller of the Currency. 

Crypto-asset deposits pose liquidity risks to banks due to the unpredictability of scale and timing of deposit inflows and outflows, the agencies said. Deposit volatility is worsened by any inaccurate and misleading deposit insurance information provided by crypto-asset-firms.

“The stability of such deposits may be driven by the behavior of the end customer or crypto-asset sector dynamics, and not solely by the crypto-asset-related entity itself, which is the banking organization’s direct counterparty,” the regulatory agencies said. “The stability of the deposits may be influenced by periods of stress, market volatility and related vulnerabilities in the crypto-asset-related entity.” 

According to a recent Office of Inspector General report, 136 FDIC-insured banks have ongoing or planned digital asset activities. Approximately 52 million Americans have invested in digital assets. 

The report did not establish new risk management principles for banks. The FDIC, OCC and Federal Reserve have warned of the risks of crypto in previous months. In early January, the regulatory agencies said exposure to the crypto industry leaves banks at greater risk of customers falling victim to scams and fraud. Though they did not explicitly call on banks not to expose themselves to the industry, they said that exposure to the crypto sphere “is highly likely to be inconsistent with safe and sound banking practices.”