US Fed Issues Warning to Banks on Crypto Liquidity Risks

On Feb 24, 2023

Cryptocurrency regulatory scrutiny from United States financial authorities has increased recently, fueled by the Terra Luna UST and FTX collapse last year. With the motive of widening the use of the United States dollar as the global reserve currency, the respective agencies have widened the regulatory net to stablecoins and the crypto-staking sector.

This is evident by the fact that Binance-backed BUSD has already been hit by the regulatory wave and will no longer be minted. Additionally, the Kraken cryptocurrency exchange has had to cease offering its crypto staking program after the SEC deemed it unregistered security.

Coinbase Global Inc CEO Brian Armstrong has condemned the U.S. agencies’ crypto crackdown noting that the industry will shift overseas, where regulations are much friendlier.

America risks losing it’s status as a financial hub long term, with no clear regs on crypto, and a hostile environment from regulators.
Congress should act soon to pass clear legislation. Crypto is open to everyone in the world and others are leading. The EU, the UK, and now HK. https://t.co/i9WeUZ7K6H
— Brian Armstrong (@brian_armstrong) February 16, 2023

Fed Warns Banks on Crypto Liquidity Crisis

According to a joint statement from the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), the banking organizations in the United States should be aware of risks associated with cryptocurrency including liquidity crunch.

“This statement highlights key liquidity risks associated with crypto-assets and crypto- asset sector participants that banking organizations should be aware of.3 In particular, certain sources of funding from crypto-asset-related entities may pose heightened liquidity risks to banking organizations due to the unpredictability of the scale and timing of deposit inflows and outflows,” the agencies noted.

The banks are expected to conduct due diligence before indulging in crypto-related business to avoid cases related to liquidity issues in the future. The agencies advised the banks to take note of the stability and demand of stablecoins, which require redemption solidity.