The U.S. Federal Reserve along with The Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) have cautioned banks on Thursday of the dangers involved in trading in cryptocurrencies and associated assets as part of its ongoing enhanced surveillance of the cryptocurrency business. The statement affirmed that some sources of funding from companies involved in crypto assets may provide increased liquidity concerns to financial institutions due to the unpredictable magnitude and timing of deposit inflows and withdrawals.
In the joint statement by the three, it was mentioned that to track the cash put by companies associated with crypto assets, banks need to have reliable systems in place. The Fed issued a warning that abrupt withdrawals may occur from stablecoin reserves as well as bank deposits made on behalf of cryptocurrency users.
The agency made the case that the security of such assets may very well be tied to the stablecoin market, the trust that stablecoin owners have in the structure of stablecoins, and the reserve management policies of the stablecoin manufacturer.
Officials said that the most recent announcement was motivated by recent changes in the crypto sector that raised worries about fluctuations. Although there are no new restrictions in the announcement, and banks are not prohibited from providing services to particular businesses, it is the latest in a string of moves by bank regulators to encourage caution in any cryptocurrency transactions. Another piece of caution from the organisation was for banks to be wary of cryptocurrency companies who falsely claim to have deposit insurance.
The FDIC started investigating the insurance claims submitted by insolvent crypto trader Voyager Digital in July 2022. The oversight authority brought charges against the Toronto-based cryptocurrency firm for allegedly promoting all depositors who are covered by the FDIC by means of its partnership with its banking partner, Metropolitan Commercial Bank. They claimed that only Metropolitan Commercial Bank was covered and not Voyager.
However, the Fed emphasised that trading in cryptocurrencies doesn’t necessitate a set of controls that are completely distinct from those used in traditional finance. The announcement urges banking companies to adhere to the present risk management standards rather than establishing any new ones. As long as it is authorised, offering financial services to customers who fall under any certain categories or types of consumers is neither prohibited by law nor discouraged by regulations. Assailing “crypto-friendly” institutions like Silvergate, U.S. Senator Elizabeth Warren criticised banking authorities last month for not doing more to safeguard consumers against cryptocurrency theft, putting the financial system in greater danger of a “crypto collapse”.