Regulators: Banks that offer crypto deposits must mitigate risks

Banking regulators today issued a joint statement reminding financial institutions of their risk management obligations should they offer depository services for cryptoassets. In the statement, the Federal Reserve, FDIC and the Office of the Comptroller of the Currency said that banks are neither prohibited nor discouraged from providing banking services that are permitted by law or regulation. However, “certain sources of funding from cryptoasset-related entities may pose heightened liquidity risks to banking organizations due to the unpredictability of the scale and timing of deposit inflows and outflows,” they said.

The risks highlighted by the agencies include the potential volatility of deposits placed by a cryptoasset-related entity that are for the benefit of that entity’s customers. “Such deposits can be susceptible to large and rapid inflows as well as outflows, when end customers react to cryptoasset-sector-related market events, media reports and uncertainty,” they said. Deposits that constitute stablecoin-related reserves are another risk as they are “susceptible to large and rapid outflows stemming from, for example, unanticipated stablecoin redemptions or dislocations in cryptoasset markets.”

According to the agencies, effective practices to manage liquidity risks include understanding the drivers of the potential behavior of deposits from cryptoasset-related entities; assessing potential concentration or interconnectedness across deposits from cryptoasset-related entities and the associated liquidity risks; incorporating the liquidity risks or funding volatility associated with cryptoasset-related deposits into contingency funding planning; and performing robust due diligence and ongoing monitoring of cryptoasset-related entities that establish deposit accounts. “In addition, banking organizations are required to comply with applicable laws and regulations,” they said.