Crypto Market Risks Are Being Emphasized by US Bank Regulators

Bank regulators in the United States are warning banks about the liquidity risks associated with stablecoin reserves and other crypto-related funding sources. 

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According to the Federal Reserve, the Comptroller of the Currency, and the Federal Deposit Insurance Corp., recent crypto-asset events have highlighted the potentially heightened liquidity risks associated with certain sources of funding. According to the statement, certain sources of funding from crypto-asset-related entities could present heightened liquidity risks. 

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Crypto markets are particularly vulnerable to large and rapid outflows of deposits that include stablecoin-related reserves.

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Cryptocurrencies and traditional currencies use stablecoins as an on-ramp and off-ramp. In most cases, the US dollar is pegged to them. 

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It is possible for stablecoins to be backed by cash or bonds as part of their reserve. Aside from warning banks to monitor deposits from crypto companies linked to their customers, the agencies also warned banks to scrutinize these deposits. 

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FTX's collapse has prompted regulators to take a more aggressive stance. The country's banking system may be affected by crypto-related risks in the future. 

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As part of Thursday's statement, they also cautioned banks to be aware of the risks of customer confusion arising from potential "inaccuracies or misleading representations of deposit insurance by crypto firms." 

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A reminder was provided by the Fed, OCC, and FDIC that banks should manage crypto-related deposits in line with existing risk-management principles.