July 17, 2024

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Banks should take heightened liquidity risks into account when dealing with cryptocurrency companies, warned a top regulator with the Fed.

The Federal Reserve’s vice chair of supervision Michael Barr, speaking at DC Fintech Week, said the interconnection between crypto companies during the market downturn over the past year highlighted the potential risks for banking organizations that become involved with them.

“When a bank’s deposits are concentrated in deposits from the crypto-asset industry or from crypto-asset companies that are highly interconnected or share similar risk profiles, banks may experience deposit fluctuations that are correlated and closely linked to broader developments in crypto-asset markets,” Barr explained.

Confusion caused by crypto companies making misrepresentations about deposit insurance could also lead to liquidations at cooperating banks, he said.

In addition to issuing supervisory guidance outlining the steps Fed-supervised banks should take before engaging with crypt assets in Aug., Barr said the Fed was collaborating with Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. to help make these institutions aware of the risks and the appropriate precautionary measures they should take.

Fed Vice Chair Says Appropriate Balance Needs To Be Struck With Regulation

However, Barr made a point to strike a conciliatory note as well. He emphasized that these statements were in no way meant as a discouragement for banks to provide their products and services to crypto-asset firms.

The regulator stressed that the efforts being made by regulatory authorities were merely to make these financial institutions aware of the risks involved.

Indeed, in his statement, Barr underscored the necessity of striking the appropriate balance when prescribing regulation. In addition to preemptively smothering innovation, an overly aggressive regulatory approach also runs the risk of cementing the positions of dominant market participants, which also raises costs for consumers.

Ultimately though, Barr made it clear that crypto asset providers need to be regulated consistently with institutions that already provided similar services, such as banking and payment institutions. “We continue to work on this issue from the overriding principle that the same type of activity should be regulated in the same way,” Barr said. 

Recommendations Mirror Those Proposed by FSB

This position was also shared by the Financial Stability Board, a global coordinator for financial regulation, in their latest recommendations for the global regulation of cryptocurrencies.

Among the nine suggestions offered to countries overseen by the board, it said that crypto asset companies should be regulated proportionate to the risks they pose, saying, “same activity, same risk, same regulation.”

Another recommendation from the FSB that echoed Barr’s statements suggested that crypto companies hold a greater amount of capital to back their assets, which is required of other financial institutions, such as banks and payment providers.

The proposal is out for public consultation until Dec 15, after which FSB members will be expected to swiftly implement these recommendations in the first half of next year.

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