US agencies recommend old risk management principles for crypto liquidity
In a joint statement released by three United States federal agencies, the banking sector was advised against creating new risk management principles to counter liquidity risks resulting from crypto-asset market vulnerabilities.
The Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) released a statement reminding banks to apply existing risk management principles when addressing crypto-related liquidity risks.
The joint statement highlighted the key liquidity risks associated with crypto-assets and related participants for banking organizations. The risks highlighted concern the unpredictable scale and timing of deposit inflows and outflows.
In other words, the federal agencies raised concerns about an event where massive selloffs or purchases would negatively impact the liquidity of the asset — potentially incurring losses for investors.
The federal agencies specifically highlighted two instances to showcase the liquidity risks associated with cryptocurrencies:
In the first instance, the price stability depends on the investors’ behavior, which can be influenced by “stress, market volatility and related vulnerabilities in the crypto-asset sector.” The second type of risk is related to the demand for stablecoins. The joint statement read:
While the trio agreed that “banking organizations are neither prohibited nor discouraged from providing banking services” as per the law of the land, it recommended active monitoring of the liquidity risks and establishing and maintaining effective risk management and controls over crypto offerings.
The agencies recommended four key practices for effective risk management to banks, which include
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