On February 23, 2023, in the wake of the deposit run experienced by Silvergate Bank, a bank holding deposits on behalf of a number of crypto-asset related entities, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (together, the “federal banking regulators”) issued a joint statement highlighting key liquidity risks presented by certain sources of funding from crypto-asset1 -related entities and outlining what the federal banking regulators consider effective practices to manage such risks (the “Joint Statement”). The Joint Statement represents the second joint action taken by the federal banking regulators this year to address risks associated with crypto-asset activities, following the issuance of the Joint Statement on Crypto-Asset Risks to Banking Organizations2 in early January.
The federal banking regulators reiterated in the Joint Statement, just as they did in January, that banking organizations are neither prohibited nor discouraged from providing legally permissible banking services to customers of any specific class or type. They cautioned, however, that certain sources of funding from crypto-asset-related entities may pose heightened liquidity risks to banking organizations due to the unpredictability of the scale and timing of deposit inflows and outflows, including:
The federal banking regulators also warned that, when a banking organization’s deposit funding base is concentrated in crypto-asset-related entities that are highly interconnected or share similar risk profiles, deposit fluctuations may also be correlated, further heightening liquidity risk.
In light of the heightened liquidity risks posed by certain sources of funding from crypto-asset-related entities, the Federal banking regulators observed that it is important for banking organizations that rely on such funding to actively monitor the liquidity risks inherent in such funding sources and establish and maintain effective risk management and controls commensurate with the level of liquidity risk from such funding sources. The federal banking regulators provided the following examples of effective risk management practices:
The Joint Statement also reminded banking organizations of their compliance obligations with respect to applicable laws and regulations, including the FDIC’s brokered deposits rules (12 C.F.R. § 337.6).
1. The term “crypto-asset” is used in the Joint Statement broadly to refer generally to “any digital asset implemented using cryptographic techniques.”
2. Our client alert on the Joint Statement on Crypto-Asset Risks to Banking Organizations is available here.
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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