The three major branches of the federal government that regulate U.S. banks are urging lenders to brush up on their risk-management practices for handling cryptocurrency assets.
The move comes as traditional financial institutions such as S&P 500 component Signature Bank
SBNY,
have handled billions in customer withdrawals in the wake of the bankruptcy of crypto company FTX last year and in a climate of volatility in digital-asset prices.
“Certain sources of funding from crypto-related entities may pose heightened liquidity risks to banking organizations due to the unpredictability of the scale and timing of deposit inflows and outflows,” the Federal Reserve System, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency said in a joint statement issued Thursday.
The regulators zeroed in on deposits placed by a crypto-asset-related entity that are for the benefit of the crypto entity’s end customers.
“The stability of such deposits may be driven by the behavior of the end customer or crypto-asset sector dynamics, and not solely by the crypto-asset-related entity itself, which is the banking organization’s direct counterparty,” the statement said.
Regulators warned that risks may be further heightened by deposit-funding base concentrations in crypto-asset-related entities that are highly interconnected or share similar risk profiles.
Banks already have risk-management rules and practices in place to address these issues.
The Fed highlighted some ways to handle these issues, including 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.
The regulators also encouraged banks to assess potential concentration or interconnectedness across deposits from crypto-asset-related entities and the associated liquidity risks, and to incorporate the liquidity risks or funding volatility into contingency-funding planning.
The Fed also recommended that banks perform “robust” due diligence and ongoing monitoring of crypto-asset-related entities that establish deposit accounts, including assessing representations made by crypto-asset-related entities to their end customers about deposit accounts.
The comments from federal banking regulators follow a flurry of regulatory moves around crypto by the U.S. Securities and Exchange Commission.
Earlier this month, the SEC charged Terraform Labs and its CEO, Do Kwon, with defrauding crypto investors and cracked down on crypto exchanges, including Kraken, which allegedly failed to register its crypto-staking program earlier this month.
In January, the SEC also hit two crypto exchanges, Gemini and Genesis Global Capital, with charges related to unregistered securities.
Also read: Crypto regulation looms, but bitcoin rallies. Here’s why.
