US regulators warn banks of liquidity risks related to deposits from crypto firms

U.S. financial regulators on Thursday warned banks of liquidity risks associated with certain sources of funding from cryptocurrency-related entities. In a joint statement , the Federal Reserve Board, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency reminded banking organizations to apply existing risk management principles. The regulators noted that the stability of bank deposits by crypto firms does not rely solely on the company itself, but on market volatility and related vulnerabilities in the industry. "Such deposits can be susceptible to large and rapid inflows as well as outflows, when end customers react to crypto market events, media reports, and uncertainty," the joint statement read. "The resulting deposit volatility can be exacerbated by end customer confusion related to inaccurate or misleading representations of deposit insurance by a crypto-related entity." The regulators also highlighted risks associated with deposits that constitute stablecoin-related reserves. "Such deposits can be susceptible to large and rapid outflows stemming from, for example, unanticipated stablecoin redemptions or dislocations in crypto markets." The agencies called on banks to actively monitor such liquidity risks and maintain effective risk management. They outlined management practices such as understanding susceptibility of deposits from crypto entities to volatility, assessing interconnectedness across such deposits, incorporating these risks into contingency funding planning, and performing robust due diligence. The regulators reiterated that banks are "neither prohibited nor discouraged" from providing banking services to crypto entities. Earlier, SEC is reportedly investigating if issuing stablecoins violates investor protection laws .