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US federal agencies issue a joint statement on liquidity risks of crypto-assets: Here is what you need to know

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TL;DR

  • The Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) have issued a joint statement concerning crypto-liquidity risks.
  • The joint statement issued by the federal agencies emphasized the major liquidity risks involved with crypto-assets and their respective participants for banking organizations.

In a joint statement, the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) have advised banks against introducing new risk management principles to address liquidity risks caused by crypto-asset market vulnerabilities.

They reminded banking organizations to stick to existing risk management principles when confronting such risks. Furthermore, the statement highlighted the potential liquidity risks associated with crypto-assets and related participants, including unpredictable scales, deposit inflows, and outflows timings. This could lead to massive selloffs or purchases that may hurt investors’ portfolios by decreasing the asset’s liquidity and resulting in losses. 

The joint statement from the federal agencies highlighted two liquidity risks associated with cryptocurrencies. The first type involves deposits made by a crypto-asset-related entity on behalf of customers, whose price stability depends on investors’ behavior and could be impacted by market volatility or stress in the crypto-asset sector. The second risk relates to the demand for stablecoins and their associated reserves, which could be subject to large outflows due to unexpected redemption requests or disrupted crypto-asset markets. By drawing attention to these risks, the agencies warn investors of potential pitfalls and ensure they make informed investment decisions. 

The agencies agreed that banking organizations could legally provide banking services for crypto offerings but suggested actively monitoring liquidity risks and implementing effective risk management measures. They outlined four key practices for banks to manage these risks effectively: conducting thorough due diligence and monitoring of crypto assets; factoring in liquidity considerations; assessing the interconnectedness between crypto offerings; and understanding the direct and indirect influences that affect deposit behavior.

On January 3, the Federal Reserve (Fed), Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) jointly issued a statement highlighting eight risks associated with cryptosystems, such as fraud, volatility, contagion, and similar issues. The agencies further stressed that it was essential to ensure that risks not amenable to mitigation or control do not migrate from the crypto-asset sector into the banking system. They also noted their case-by-case approaches to date regarding changing cryptographic regulations.

Disclaimer. The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decision.

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Damilola Lawrence

Damilola is a crypto enthusiast, content writer, and journalist. When he is not writing, he spends most of his time reading and keeping tabs on exciting projects in the blockchain space. He also studies the ramifications of Web3 and blockchain development to have a stake in the future economy.

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