The Fed reminded of the liquidity risks associated with crypto firms

Fed, FDIC And OCC released a joint statement reminding U.S. lenders of the potential risks posed by companies focused on providing crypto services.

@federalreserve @FDICgov @USOCC issue joint statement on liquidity risks resulting from crypto-asset market vulnerabilities: https://t.co/XDTOB0SvPJ

— Federal Reserve (@federalreserve) February 23, 2023

Regulators cited the “unpredictability of the scale and timing of the inflow and outflow of deposits” of such organizations.

As risks, the document mentions:

• volatility of the cryptocurrency market;
• risks bank-wound (as happened in the case of Terra USD);
• decoupling of stablecoins from parity with fiat currency;
• periods of stress and panic among users due to market events, media reports and uncertainty.

“The stability of such deposits may be related to the demand for stablecoins, the trust of the owners „stablecoins” and practice of issuers’ management of their reserves, — explained in the statement.

Regulators have advised banks to look for crypto companies that inaccurately or deliberately report to customers about the participation of client deposits in the FDIC insurance program.

In July 2022, the Corporation had similar claims against Voyager Digital going through bankruptcy proceedings.

Liquidity risks for banks may be exacerbated by the close relationship of crypto companies or their similar operating profile. In this case, fluctuations in deposit flows can be closely correlated, experts explained.

The statement does not contain new risk management principles, but only reminds banks of the need to apply existing ones.

“Credit institutions are not prohibited or prevented from providing banking services to customers of any particular class or type, as permitted by law or regulation,” — emphasized in the document.

In January 2023, Signature Bank cut ties with Binance’s international business. On February 10, it became known that NYDFS initiated an investigation against the exchange’s partner in issuing stablecoins BUSD. The regulator later ordered Paxos to stop making them. The media also reported on the readiness SEC sue the infrastructure company.

Bloomberg previously reported that the U.S. Department of Justice Fraud Unit is investigating Silvergate’s deals with FTX platform and related hedge fund Alameda Research.

According to the results of October-December 2022, the bank recorded a loss of $1.05 billion. The deterioration of the operating environment was caused by the collapse of the Sam Bankman-Freed exchange, which was a client of the bank.

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