The Fed, FDIC, and OCC Warn Banks of Crypto Risks

US banking regulators have issued a new warning to banks to monitor for potential liquidity risks from clients involved in crypto.

The Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued a joint statement on Thursday. The federal agencies advise banks to have robust tools in place to monitor funds placed by crypto-asset-related entities. The statement comes in response to recent events that have highlighted volatility risks in the crypto sector.

The regulators noted that deposits placed with banks for the benefit of crypto consumers, as well as stablecoin reserves, could be subject to rapid outflows.

Cryptos and Stablecoins Are Susceptible to Volatility, Warns Regulators

The new guidance represents the first time that the bank regulators have specifically highlighted deposits linked to stablecoins as being susceptible to volatility during periods of stress in the crypto market.

Stablecoins are a type of cryptocurrency that is typically pegged to the US dollar. Most major stablecoins, including Tether and USD Coin, are asset-backed, meaning that the stablecoin issuer holds assets. These may include bank deposits, that can quickly be redeemed to meet withdrawal requests.

Regulators expressing concerns about the stability of those reserves could cause banks to examine their relationship with stablecoin firms further. The statement noted that stablecoin reserves could experience large and rapid outflows. Especially in cases of unanticipated stablecoin redemptions and turmoil in crypto markets.

It is worth noting that the regulators are not imposing new requirements. Banks are not prohibited from providing services to particular sectors. Still, the latest guidance is part of a series of moves from regulators urging caution in any dealings involving crypto.