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US authorities recommend old risk management principles for crypto liquidity

Published on

February 25, 2023
Read Time:2 Minute, 6 Second

In a joint assertion launched by three U.S. federal companies, the banking sector was discouraged from creating new threat administration insurance policies to counteract liquidity dangers stemming from vulnerabilities within the crypto-asset market.

The Federal Reserve Board of Governors, the Federal Deposit Insurance coverage Company (FDIC) and the Workplace of the Comptroller of the Forex (OCC) Approved a press release reminding banks to use present threat administration rules when coping with crypto-related liquidity dangers.

The joint assertion highlighted the important thing liquidity dangers related to crypto property and associated members for banking organizations. The dangers highlighted relate to the unpredictable magnitude and timing of deposit inflows and outflows.

In different phrases, federal authorities raised issues about an occasion the place huge sell-offs or shopping for would negatively affect the asset's liquidity -- probably resulting in losses for traders.

Federal authorities particularly highlighted two instances to reveal the liquidity dangers related to cryptocurrencies:

  1. Deposits positioned by a crypto-assets-related entity for the advantage of the shoppers (finish clients) of the crypto-assets-related entity.
  2. Deposits representing stablecoin-related reserves.

At first, value stability relies on investor habits, which could be affected by “stress, market volatility and associated vulnerabilities within the crypto-asset sector.” The second sort of threat is said to demand for stablecoins. The joint assertion learn:

“Such deposits could be susceptible to massive and speedy outflows ensuing from, for instance, surprising stablecoin redemptions or dislocations in crypto-asset markets.”

Whereas the trio agreed that "banking organizations shall not be prohibited or discouraged from offering banking companies" underneath the nation's regulation, they really helpful actively monitoring liquidity dangers and establishing and sustaining efficient threat administration and controls over cryptocurrency Affords.

The companies really helpful 4 key practices for banks to handle threat successfully, together with conducting strong due diligence and oversight of crypto property, contemplating liquidity dangers, assessing the interconnectedness between crypto choices, and understanding the direct and oblique drivers of potential habits from cryptocurrencies Insoles.

Associated: Proceed with warning: Crypto warning from the US banking regulator

On Jan. 3, the identical three federal companies — the Fed, FDIC, and OCC — issued a joint assertion highlighting eight dangers within the crypto system, together with fraud, volatility, contagion, and related points.

The companies collectively said:

“It's important that dangers related to the crypto-asset sector that can't be mitigated or managed don't migrate into the banking system.”

The assertion highlighted the opportunity of altering crypto rules with references to the authorities' "earlier case-by-case approaches."

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Azeez Mustafa
Azeez began his FinTech career path in 2008 after growing interest and intrigue about market wizards and how they managed to become victorious on the battlefield of the financial world. After a decade of learning, reading and training the ins and outs of the industry, he’s now a sought after trading professional, technical/currency analyst and funds manager – as well as an author.
Last Updated : February 25, 2023
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