On February 23, The Board of Governors of the Federal Reserve System (the Board), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the Agencies) issued a statement on the liquidity risks presented by funding provided to banks related to certain crypto activities and offering some effective practices to manage such risks when engaging with deposits associated with crypto entities.

In the blog accompanying its release, the Board explained the impetus for the joint statement. “Recent events in the crypto-asset sector have underscored the potential heightened liquidity risks presented by certain sources of funding from crypto-asset-related entities. The joint statement highlights key liquidity risks and some effective practices to monitor and appropriately manage those risks. The statement reminds banking organizations to apply existing risk management principles; it does not create new risk management principles.” The blog post concluded with the reminder that banks “are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation.” This comes on the heels of the Agencies providing a warning in January that “holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices.”

In their statement, the Agencies indicated a concern with heightened liquidity risk arising “[w]hen a bank’s deposit funding base is concentrated in crypto-asset-related entities that are highly interconnected or share similar risk profiles.” Specifically, they identified the following two examples of situations posing heightened liquidity risks:

• Deposits placed by a crypto-asset-related entity that are for the benefit of their customers (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.
  • This uncertainty can be exacerbated by end customer confusion related to inaccurate or misleading representations of deposit insurance.
• Stablecoin-related reserves.
  • The stability of such deposits may be linked to demand for stablecoins, the confidence of its holders, and the issuer’s reserve management practices.

To combat these risks, the Agencies advocated for implementation of the following risk management strategies:

• Understanding the extent to which these deposits are susceptible to unpredictable volatility.
• Assessing potential interconnectedness across deposits from crypto-asset-related entities.
• Incorporating these liquidity risks into contingency funding planning, including liquidity stress testing.
• Performing ongoing monitoring of crypto-asset-related entities, including the representations made by those entities to their end customers about such deposit accounts.

This joint statement continues a trend by federal regulators, reported here, here, and here, warning banks to exercise caution in regards to crypto-assets.