The Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) are issued a joint statement on the liquidity risks presented by certain sources of funding from crypto-asset-related entities and some effective practices to manage such risks. The following are key liquidity risks associated with crypto-assets and crypto-asset participants that these agencies believe banking organizations should be aware of:
- Deposits placed by a crypto-asset-related entity that are for the benefit of the crypto-asset-related entity’s customers (end customers). The stability of the deposits may be influenced by periods of stress, market volatility, and related vulnerabilities in the crypto-asset sector, which may or may not be specific to the crypto-asset-related entity. Such deposits can be susceptible to large and rapid inflows as well as outflows, when end customers react to crypto-asset-sector-related market events, media reports, and uncertainty.
- Deposits that constitute stablecoin-related reserves. The stability of such deposits may be linked to demand for stablecoins, the confidence of stablecoin holders in the stablecoin arrangement, and the stablecoin issuer’s reserve management practices.
In the joint statement, the agencies stress that it is vital banking organizations that use certain sources from crypto-asset-related activities monitor the liquidity risks and establish effective risk management and controls. Effective practices for banking organizations include the following:
- Understanding the direct and indirect drivers of potential behavior of deposits from crypto-asset-related entities and the extent to which those deposits are susceptible to unpredictable volatility.
- Assessing potential concentration or interconnectedness across deposits from crypto-asset-related entities and the associated liquidity risks.
- Incorporating the liquidity risks or funding volatility associated with crypto-asset-related deposits into contingency funding planning, including liquidity stress testing and, as appropriate, other asset-liability governance and risk management processes.
- Performing robust due diligence and ongoing monitoring of crypto-asset-related entities that establish deposit accounts, including assessing the representations made by those crypto-asset-related entities to their end customers about such deposit accounts that, if inaccurate, could lead to rapid outflows of such deposits.
While the joint statement reminds banking organizations to apply existing risk management principles, it does not create new risk management principles. To view the full joint statement on liquidity risks resulting from crypto-asset market vulnerabilities, please visit this link.