Banking Regulators Provide Caution on Crypto Funding

The Federal Reserve Board, the FDIC and the OCC cautioned that banks may face significant liquidity risks in relying on funding from entities in the crypto industry.

In a joint statement, the agencies warned of heightened liquidity risks for banks whose deposit funding comes from crypto asset-related entities that are "highly interconnected" or share similar risk profiles due to the "unpredictability of the scale and timing" of deposits and withdrawals. The agencies cautioned that crypto asset stability is largely influenced by factors beyond the control of the crypto asset-related entity. As a result, crypto assets may be susceptible to large and rapid inflows and outflows when customers react to sector-related uncertainty. The agencies warned that even stablecoin-related deposits may be subject to periods of significant instability caused by unanticipated redemptions or dislocations in crypto asset markets.

To mitigate risks posed by crypto asset-related sources of funding, the agencies encouraged banking organizations to:

• identify and understand the direct and indirect drivers of potential volatility of deposits from crypto asset-related entities;

• assess potential concentration or interconnectedness across deposits from crypto asset-related entities;

• incorporate crypto asset-related liquidity risks or funding volatility into contingency funding planning; and

• conduct "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."