US regulatory bodies suggest utilizing traditional risk management principles for managing crypto liquidity.2 min read
Three US federal agencies have issued a joint statement advising banks against developing new risk management principles to mitigate liquidity risks stemming from vulnerabilities in the crypto-asset market.
Instead, the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have reminded banks to use existing risk management principles to manage liquidity risks related to crypto-assets.
The statement identified the liquidity risks associated with crypto-assets and their participants, particularly concerning the unpredictable timing and scale of deposit inflows and outflows. The agencies expressed concern that a significant selloff or purchase event could negatively impact asset liquidity, resulting in investor losses. To illustrate these liquidity risks, the statement highlighted two specific instances related to cryptocurrencies.
- Deposits placed by a crypto-asset-related entity for the benefit of the crypto-asset-related entity’s customers (end customers).
- Deposits that constitute stablecoin-related reserves.
According to the joint statement, the stability of prices is reliant on the conduct of investors, which can be swayed by factors such as “stress, market volatility, and associated weaknesses in the crypto-asset field.” The second form of risk pertains to the need for stablecoins.
“Such deposits can be susceptible to large and rapid outflows stemming from, for example, unanticipated stablecoin redemptions or dislocations in crypto-asset markets.”
The three parties reached an agreement that banking institutions should not be prevented or discouraged from providing banking services in accordance with the law. However, they suggested that there should be active supervision of liquidity risks and the establishment and maintenance of efficient risk management and controls over crypto offerings.
To ensure effective risk management, the agencies recommended four crucial practices for banks. These include conducting comprehensive due diligence and monitoring of crypto assets, considering liquidity risks, evaluating the interdependence between crypto offerings, and comprehending the direct and indirect influences on the potential behavior of deposits.
The Federal Reserve (Fed), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued a collective statement on January 3rd, citing eight potential risks associated with the cryptocurrency system. The hazards identified included fraud, instability, and the potential spread of risk, among other issues.
The agencies made a joint declaration in which they addressed the aforementioned risks.
“It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system.”
The statement noted that there is a potential for modifications to be made to cryptocurrency regulations, referencing the agencies’ “case-by-case approaches” used up to this point.