Banks Must Be Aware Of Heightened Risks In Dealing With Crypto Firms
Recently, the Federal reserve’s vice chair, Michael Barr, spoke about happenings in the crypto space at the dc FinTech week. During his speech, Barr said the integration of crypto firms during the current crypto winter in the last 12 months is a sign of enormous risks for any financial institution that does business with them.
Barr explained that when a large portion of banks’ deposits is from crypto firms, they have common risk profiles. Hence, banks may experience variations in deposits that closely mirrors happenings in the broader crypto market. He added that these misrepresentations of deposit insurance would lead to confusion and possibly liquidation of the cooperating banks.
Barr revealed the steps the Fed is taking to assist Fed-supervised banks having any business relationship with crypto firms. According to him, the Fed has partnered with the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency to make these banks aware of the risks involved in what they’re doing. The Fed is also issuing supervisory guidance for these institutions and providing them with the necessary steps to protect themselves.
Barr also explained that his intention was not to discourage banks from having business relationships with crypto firms. Instead, he wants financial institutions to be aware of the possible risks involved in these practices. Barr emphasized the need to strike the right balance while suggesting regulatory policies.
The Fed vice chair emphasized that an excessively aggressive regulatory approach stifles innovation and solidifies the positions of dominant market players. Thus, causing consumers to pay higher costs for services that innovations would have rendered cheaper. Barr also said there is a need for virtual asset providers to be subjected to similar regulations with institutions that provide similar services.
The FSB supports the Fed’s suggestions
In its latest recommendations for uniform crypto regulation, the global coordinator for financial regulation, the FSB (the financial stability board), supported some of the Fed’s suggestions. Like the Fed, the FSB also wants crypto firms to be regulated by a similar level of risks they pose. The FSB also wants crypto firms to increase the amount of capital that backs their crypto assets.
According to the FSB, that is what’s obtainable with banks, payment providers, and other financial institutions. The FSB’s proposals are available for public consultation. But the FSB will shut down the public consultation by December 15 and implement the recommendations by 2023.
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