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US Regulators Warn About the Market Vulnerabilities Inherent in Cryptos

The Federal Reserve led other banking regulators in a subsequent statement that warned banks that cryptos carry inherent market vulnerabilities. The Fed decried that cryptos suffer liquidity risks whose contagion to the banks would become detrimental to the US financial system. 

Reinforced Efforts to Steer Lenders Away from Risky Cryptos

The Federal Reserve echoes sentiments conveyed by banking agencies in a unanimous call for a conservative integration cryptos. 

In particular, the regulatory agencies propose a cautious approach given the liquidity dangers of cryptos. The joint statement issued on Thursday, February 23, reinforced the agencies’ campaign to steer financial institutions away from risky digital assets. 

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Regulators Challenging Banks to Exercise Cautionary Arrangements in Crypto Activities

The agencies issuing the joint statement supported perspectives often conveyed by the Federal Deposit Insurance Corp calling for cautionary engagements. In support, the Office of the Comptroller of the Currency indicated that engaging in crypto-related activities is not illegal and that warnings issued were formal cautions. 

Notably, the cautionary statements conveyed that lenders dabbling in digital assets would have a cut task to explain their negligence. 

The agency’s statement emphasizes that deposits made by crypto firms are susceptible to instability as they rely upon the crypto-asset sector dynamics even if the entity involved is stable. 

Vulnerability of Deposits by Crypto Firms

The regulators observed that deposits made by crypto operators are vulnerable to suffering huge and rapid transactions. Outflows and inflows are inevitable, particularly when the customers respond to crypto-related market events, media reporting and economic uncertainty. 

The regulators waded into the prevailing stablecoin issue, cautioning banks that the reserves deposited in the lender’s accounts could suffer occasional volatility. 

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The occurrence of unanticipated events could trigger the redemption of stablecoins. Also, dislocations and depegging would become calamitous to lenders with significant holdings. 

Vulnerability to Reliance in Crypto-related Activities

The regulators acknowledged that the majority of companies worldwide perceive digital transformation as a priority. As such, blockchain is rapidly becoming a critical technology as a means of exchanging value, sharing data and raising funds securely globally. 

Crypto adoption is set to scale to unprecedented levels. In particular, the blockchain is set to realize increased market size to US$1.43 trillion in 7 years. The growth in crypto adoption translates to increased vulnerability to risk.

The US regulators echoed previous formal warnings issued in singularity. Each agency regretted that significant exposure to virtual currencies and reliance on crypto-related activity as a significant constituent of the bank’s business would draw regulators’ scrutiny over the lender’s safety and soundness. Specifically, the joint statement served as a polite reminder obliging banks to avoid such concentrations as they are on the agencies’ radar.

Concentrated Funding Base Aggravate Liquidity Risk 

The agencies warned that occasions when the banking entity’s deposit funding base concentrates around crypto-asset operators, heighten the liquidity risk. 

The statement noted that liquidity risk becomes inevitable when such digital assets entities have high interconnection or carry with them similar risk profiles. Often, such deposits suffer correlated fluctuations that heighten the risk further. 

The joint statement conveys a cautionary warning challenging banks to proactively assess the risk when engaging in crypto-related assets and activity.

Criticism of Joint Statement as Overlooking Current Requirements

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The statement is attracting criticism among procrypto lawmakers and advocates. In particular, Ohio Senator Sheerod Brown tore to the statement challenging the regulators to prioritize clarity through a comprehensive regulatory framework for the cryptos. 

As the chair of the Senate Banking Committee, Senator Brown tasked the agencies to provide more clarity to the banks. He added that a comprehensive framework would protect investors’ hard-earned money from fraudulent crypto activities.  

The cautionary statement issued by the regulators jointly coincides with the Environmental Protection Agency (EPA) push for mandatory disclosure regime for crypto mining companies. The quest derives inspiration from Senator Elizabeth Warren demanding scrutiny of crypto mining activities to ascertain the energy usage and compliance with the carbon emissions goals.


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Stephen Causby

Stephen Causby is an experienced crypto journalist who writes for Tokenhell. He is passionate for coverage in crypto news, blockchain, DeFi, and NFT.

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