Three U.S. federal banking regulators issued a clarification to banking institutions on Thursday: Serving the crypto industry is neither illegal nor frustrating.
That said, agencies including the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) cite various risks to keep in mind when interacting with the crypto industry, and which risk management practice outcomes to follow.
The statement begins by reminding banks to apply existing risk management principles when dealing with crypto companies but does not lay out any new principles to follow. "A banking institution is neither prohibited nor dissuaded from providing banking services to any particular class or type of customer as permitted by law or regulation," it said.
That said, the regulator claims that certain “liquidity risks” affect cryptocurrencies more strongly than other industries. One reason is the “unpredictability” of deposit inflows and outflows especially deposits made for the immediate benefit of crypto physical clients.
“The stability of deposits may be affected by factors such as periods of stress, market volatility, and related vulnerabilities in the crypto-asset space,” the statement explained. For example, end-customers may be sensitive to market-related news and Responding to Uncertainty – This can be exacerbated by misleading statements by entities related to FDIC insurance.
After the collapse of FTX and Alameda Research last year, cryptocurrency bank Silvergate experienced a run on customer deposits, with 60% of its funds disappearing within 2 months. It held $4.6 billion in cash by the end of 2022 -- $4.3 billion of which came from Federal Home Loan Bank advances, helping to stave off a run.
The regulator also warned of volatility in deposits tied to stablecoin reserves. “The stability of such deposits may be related to the demand for stablecoins, the confidence of stablecoin holders in stablecoin arrangements, and the reserve management practices of stablecoin issuers,” they said.
In December, Binance was forced to temporarily freeze USDC withdrawals due to a problem with a bank in New York converting its BUSD to USDC, which closed amid an influx of withdrawals.
The regulator advised banks to understand the drivers of deposit volatility in their respective businesses and the “correlationship” of deposit-related liquidity risk between crypto-asset entities. As previously mentioned, volatility in deposits can be correlated between crypto entities that share a similar risk profile, creating risks for companies primarily focused on servicing the industry.
Following the statement, Custodia Bank founder Caitlin Long praised the three regulators for recognizing the “clear” risks associated with crypto banking. Long has long pushed to secure a "master account" for her bank through the Federal Reserve System and is suing the central bank for refusing to grant it.
