US Regulators Warn Banks Regarding Crypto Liquidity Risks

The Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have advised financial institutions to have appropriate effective systems in place to monitor monies associated with crypto businesses.

In specific terms, the agencies warned commercial banks to exercise caution when dealing with crypto transactions. According to their statements, cash deposits including stablecoin reserves made by crypto users could experience sudden outflows due to the risk of crypto volatility. 

However, the agencies made no attempt to enact any regulatory regulations while highlighting the crypto-related liquidity risks.

While they highlighted that the statement does not stop banks from carrying out crypto-related services, it does mark the latest in a slew of actions from bank authorities advising prudence in any crypto deals.

Interestingly, the news follows an announcement made by the New York State Department of Financial Services (NYDFS) that it has upgraded technology tools for tracking the actions of virtual organizations that are subject to regulation.

Regulators Express Concern About Stablecoins

Stablecoins are cryptocurrencies that are designed to maintain a stable value by being backed by traditional assets such as fiat currency. 

While stablecoins have gained popularity among crypto traders and investors, regulators are expressing concern about their stability and potential risks to the financial system. One of the concerns is that stablecoins are often issued by private companies, which could lead to issues if the issuer experiences financial difficulties or engages in fraudulent behavior.

Regulators are, therefore, stepping up their control of stablecoins in a number of nations to allay these worries. For instance, the US Securities and Exchange Commission (SEC) has declared Paxos’ issued stablecoin (BUSD) to be a security and as such be governed by US securities regulations.

Meanwhile, regulators’ worries about the stability of stablecoins reserves might lead banks to reevaluate their partnerships with stablecoin companies. This could invariably lead to huge and abrupt withdrawals in circumstances of unexpected stablecoin redemptions and market volatility.

Notably, a recent report revealed that crypto investments recorded an outflow of $32 million following harsh crypto regulatory action against the US digital asset market