Recent pronouncements, speeches and guidance issued by the U.S. banking agencies have made their stance on cryptocurrency clear: digital assets may be a threat to the safety and soundness of the banking system, and they are going to take a cautious approach to crypto-asset-related activities and exposures at each banking organization.
The latest action from the agencies relates to the liquidity risks posed by the crypto-asset sector. On February 23, 2023, the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued a joint statement on the liquidity risks associated with certain deposit funding associated with crypto firms. In particular, the agencies highlighted that deposits placed by a crypto firm for the benefit of such firm’s customers are likely to be driven by the behavior of those customers (end customers) or by larger crypto-asset sector dynamics. As such, the stability of those deposits may be influenced by market volatility and other factors and, therefore, “susceptible to large and rapid inflow as well as outflows, when end customers react to [crypto-related] market events, media reports, and uncertainty.” The agencies also flagged liquidity risks of deposits that constitute stablecoin-related reserves. Because 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,” they can be prone to large and repaid outflows relating to unanticipated stablecoin redemptions or dislocations in the crypto-asset markets.
Perhaps in response to some concerns within the crypto community that recent regulatory and enforcement scrutiny of the crypto-asset sector is morphing into an “Operation Choke Point 2.0,” the agencies noted that banking organizations are “neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation.” Nevertheless, the agencies make clear in their latest joint statement that they will expect “robust due diligence and ongoing monitoring” of crypto firms that establish deposit accounts, including assessing the representations made by such firms to their end customers about such deposit accounts that, if inaccurate, could lead to rapid deposit outflows.