U.S Fed Issues Warnings to Banks Over Dangers of Crypto Association

• The Fed has warned about the stress and panic that can occur in the crypto market.
• The statement warned that banks face greater risks of running dry of cash.

The U.S. Federal Reserve published a fresh statement on Thursday alerting banks of the dangers associated with trading in cryptocurrency and similar assets, continuing its intensified scrutiny of the cryptocurrency sector.

The statement warned that banks face greater risks of running dry of cash because of the volatility of deposits and withdrawals from crypto-asset-related businesses. The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation have each issued similar warnings to banks about cryptocurrency, joining the Federal Reserve.

Cautioned To Be Vigilant

The Federal Reserve has warned about the stress and panic that can occur in the cryptocurrency market as a result of market events, media reports, and uncertainty. This includes the possibility of bank runs and stablecoins de-pegging from the dollar, or “dislocation,” as in the case of Terra USD (UST).

The agency stated:

“The stability of such deposits may be linked to demand for stablecoins, the confidence of stablecoin holders in the stablecoin arrangement, and the stablecoin issuer’s reserve management practices.”

The association, therefore, cautioned financial institutions to be vigilant against cryptocurrency firms that exaggerate or misrepresent the extent to which customer deposits are protected.

The Federal Deposit Insurance Corporation began looking into insurance claims made by defunct cryptocurrency broker Voyager Digital in July 2022. The FDIC has accused Voyager, a Toronto cryptocurrency company, of approaching all customers insured by FDIC protection via its relationship with Metropolitan Commercial Bank. Yet, FDIC records showed that only Metropolitan Commercial Bank and not Voyager were insured.

Yet, the general caution appeared to also emphasize that trading cryptocurrencies doesn’t need a completely different set of rules than conventional finance.