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US Regulators Issue Second Joint Statement to Banking Organizations on Crypto-Asset Risks
Practical Law Legal Update w-038-6332 (Approx. 6 pages)
US Regulators Issue Second Joint Statement to Banking Organizations on Crypto-Asset Risks
by Practical Law Finance
| Published on 28 Feb 2023 • USA (National/Federal) |
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of Currency (OCC) issued a second joint statement to banking organizations on liquidity risks from crypto-asset market vulnerabilities.
On February 23, 2023, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Company (FDIC), and the Office of the Comptroller of Currency (OCC) (collectively, the agencies) issued a joint statement to banking organizations on liquidity risks from crypto-asset market vulnerabilities. Rather than provide new risk-management principles, the joint statement serves as a reminder to banking organizations to apply existing principles (see Practice Note, Risk Governance Standards for Large Financial Institutions).
The joint statement addresses liquidity risks related to certain funding sources from crypto-asset-related entities, some of which were identified in the agencies' January 3, 2023 statement on crypto-asset risks to banking organizations (see Legal Update, Federal Banking Agencies Issue Joint Statement on Crypto-Asset Risks to Banking Organizations). Building on the previous statement, the agencies provide the following examples of funding sources that pose heightened liquidity risks to banking organizations due to the unpredictability of the scale and timing of deposits and withdrawals:
- Crypto-asset-related entity deposits made for the benefit of the entity’s end customers. The stability of these deposits may be impacted by the end customer's behavior or crypto sector dynamics, such as:
- periods of stress;
- market volatility; and
- related vulnerabilities in the crypto-asset sector, which may or may not be specific to the crypto-asset-related entity.
- Deposits that constitute stablecoin-related reserves. The stability of these deposits may be impacted by:
- stablecoin demand;
- stablecoin holders' confidence in the stablecoin arrangement; and
- the stablecoin issuer's reserve management practices.
The joint statement identifies the following risk-management practices to address these heightened risks:
- Understanding the drivers, direct and indirect, of behavior of deposits from crypto-asset-related entities and the degree that these deposits are vulnerable to volatility.
- Assessing potential concentration or interconnectedness across deposits from crypto-asset-related entities and the associated liquidity risks.
- Incorporating the liquidity risks or funding volatility associated with crypto-asset-related deposits into contingency funding planning, including asset-liability governance and risk-management processes, such as liquidity stress testing.
- Performing due diligence and ongoing monitoring of crypto-asset-related entities that establish deposit accounts, including assessing representations made to end customers about their accounts that could potentially lead to rapid withdrawals.
The joint statement reinforces that banking organizations must continue to comply with existing laws and regulations. For insured depository institutions (IDIs), this includes brokered deposits rules and Consolidated Reports of Condition and Income filing requirements (see Practice Notes, Bank Supervision and Examinations and Brokered Deposits).
The joint statement aligns with the White House roadmap to mitigate cryptocurrency risks announced by the National Economic Council (NEC) on January 27, 2023. The roadmap, developed in response to direction from President Biden, encouraged federal agencies to use their authorities to ramp up enforcement where appropriate and issue new guidance where needed in order to mitigate crypto risks.