Crypto: Fed, top U.S. regulators, IMF issue fresh warnings on risks
Top U.S. regulators including the Federal Reserve, as well as the International Monetary Fund, on Thursday issued new warnings and recommendations on various cryptocurrency-related policies and risks.
The U.S. regulators — the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency — issued a statement Thursday morning encouraging banks that use funding from crypto firms to monitor liquidity and maintain strong risk management practices to prevent runs.
They warned that deposits the banks host from crypto firms can be impacted by periods of stress in markets, volatility, and outside factors over which crypto firms have no control. The agencies encouraged banks to use existing risk management tools to guard against runs, but they stopped short of creating and requiring new risk management rules.
Among the recommendations:
Understand what could impact deposits from crypto firms and how susceptible those deposits are to volatility.
Assess interconnectedness across deposits from crypto assets and liquidity risks
Build a contingency plan and stress testing liquidity
Monitor crypto deposit accounts at banks regularly
The statement came as Atlanta Fed President Rafael Bostic on Thursday said he hopes crypto doesn’t replace the proven components of the traditional payment and banking systems.
In conversation with former Kansas City Fed President Esther George at the Atlanta Fed, Bostic said he agreed with George’s comments that she does not see cryptocurrencies “supplanting some of these more tired and true rails at this point.”
“I hope that's true, because there's a lot of volatility. And that volatility — to the extent it gets into the asset base of institutions — I think it becomes really hard to manage, and we'll just have to think about that and how we deal with that in the future,” Bostic said.
The 'right step'
JPMorgan analyst Steven Alexopoulos said the joint statement from the Fed and others indicates increased regulatory concerns around the risks of serving the crypto industry and will likely limit banks’ usage of these deposits in terms of deploying into loans and held-to-maturity securities.
“Instead, these deposits are likely to be kept very liquid in cash and available for sale securities, which limits the attractiveness of these deposits,” Alexopoulos wrote in a note to clients.
The regulators’ actions come after a sharp decline in crypto-related deposits following a crisis of confidence from digital asset customers at Silvergate Capital, draining its liquidity.
Sen. Sherrod Brown (D-OH), chairman of the Senate Banking Committee, which held a hearing last week on the FTX crash, called the agencies' statement and actions the "right step" to offer banks clarity and protect investors as lawmakers consider new regulations for crypto.
"As we continue to learn the full extent of the fallout from the crypto industry’s collapse, it’s important that we use our existing financial safeguards to protect consumers and our economy from crypto’s risks," Brown said.
Meanwhile, the International Monetary Fund released a paper Thursday encouraging member countries not to grant crypto assets official currency or legal tender status. The recommendation is part of a long list that offers guidance to IMF member countries on policies to govern crypto assets and implications for monetary and fiscal policies.
The IMF also suggests establishing clear-cut guidelines for tax treatment of crypto, developing and enforcing rules requirements applicable to all crypto market actors, establishing a framework to allow domestic agencies to collaborate in overseeing crypto, putting in place international agreements for crypto oversight and monitoring the impact of crypto assets on the stability of the international financial system.
