• US agencies released a joint statement recommending old risk management principles for crypto liquidity.
• The statement highlighted the key liquidity risks associated with crypto-assets and related participants for banking organizations.
• These risks concern the unpredictable scale and timing of deposit inflows and outflows, as well as demand for stablecoins.
US Agencies Recommend Old Risk Management Principles for Crypto Liquidity
The Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) have jointly issued a statement reminding banks to apply existing risk management principles when addressing crypto-related liquidity risks.
Risks Associated With Crypto-Assets
The joint statement highlighted two key liquidity risks associated with crypto-assets and related participants for banking organizations: deposits placed by a crypto-asset-related entity for their customers‘ benefit, and deposits that constitute stablecoin reserves. The unpredictable scale and timing of deposit inflows and outflows could lead to massive selloffs or purchases that could negatively impact an asset’s liquidity, potentially incurring losses on investors. Additionally, price stability is highly dependent on investor behavior which can be affected by stress, market volatility, etc. in the crypto sector.
Another type of risk outlined was specifically related to demand for stablecoins. This means that any disruption in reserve requirements or other aspects affecting stability could lead to losses from investors or holders if not properly managed by banks or financial institutions.
Existing Risk Management Principles
Banks are advised to use existing risk management principles when dealing with these types of scenarios in order to mitigate potential losses due to liquidation events or any other factors affecting an asset’s stability in light of new technology entering the space such as blockchain technology or smart contracts. Banks must also ensure they have access to sufficient capital reserves in order to cover any unexpected losses that may arise during such events.
In conclusion, banks should take caution when dealing with digital assets — especially those backed by cryptocurrencies — due to their unique characteristics as compared to traditional assets and securities, which may require additional oversight when it comes to mitigating potential risks associated with them. Additionally, applying existing risk management principles will help banks protect themselves against any unforeseen events that may arise from volatile markets or disruptions caused by new technologies entering this sector.