Solution for crypto liquidity from US institutions

Solution for crypto liquidity from US institutions

A joint statement issued by the three federal agencies of the United States advised the banking industry not to create new risk management principles to counter liquidity risks arising from vulnerabilities in the crypto-asset market.

The Federal Reserve Board of Directors, the Federal Deposit Insurance Corporation (FDIC), and the Office of Currency Control (OCC) have issued a statement reminding banks to apply current risk management principles when addressing crypto-related liquidity risks.

In addition, a joint statement highlighted the key liquidity risks associated with cryptoassets and related participants for banking institutions. It was stated that the highlighted risks were related to the unpredictable scale and timing of deposit inflows and outflows.

However, federal agencies specifically drew attention to two examples to illustrate the liquidity risks associated with cryptocurrencies:

  1. Deposits deposited by a crypto-related organization for the benefit of customers of the crypto-related organization.
  2. Deposits that make up stablecoin-related reserves.

First, price stability is thought to depend on the behavior of investors, which can be affected by stress, market volatility and related vulnerabilities in the crypto-asset sector. The second type of risk is related to demands for stable tokens. The joint statement included the following statements:

“Such deposits can be vulnerable to large and rapid outflows, for example, from unexpected stablecoin payments or disruptions in crypto-asset markets.”

While all three federal boards agreed that under the laws of the country, banking institutions are neither prohibited nor prevented from providing banking services, they recommended that liquidity risks be actively monitored and that effective risk management and controls over crypto offerings should be established and maintained.

On the other hand, institutions offered banks four basic practices for effective risk management. These recommendations include performing robust due diligence and monitoring of cryptoassets, incorporating liquidity risks, assessing the link between crypto offerings, and understanding the direct and indirect drivers of the potential behavior of deposits.

You may be interested in: Crypto alert from the US Currency Regulatory Office!

Finally, at the beginning of January, the same three federal agencies issued a joint statement drawing attention to eight separate risks in the ecosystem, including fraud, volatility, contamination and similar issues.

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