United States flag with Bitcoin cryptocurrency
iStockphoto.com / 24K-Production

Crypto firms potentially pose added liquidity risks to banks that rely on funding from crypto-related deposits, U.S. regulators are warning.

In a joint statement, federal banking regulators — the U.S. Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency — alerted banks to the exceptional liquidity risks that could arise given the unpredictability of deposit inflows and outflows from crypto firms.

“Recent events in the crypto-asset sector have underscored the potential heightened liquidity risks presented by certain sources of funding from crypto-asset-related entities,” the regulators said.

For instance, the statement noted that deposits from crypto firms may be heavily affected by the sentiment of crypto users, rather than the firm that the bank is dealing with.

“The stability of the deposits may be influenced by, for example, periods of stress, market volatility, and related vulnerabilities in the crypto-asset sector, which may or may not be specific to the crypto-asset-related entity,” it said.

Additionally, these kinds of deposits could experience large, rapid inflows and outflows, driven by clients’ reactions to market events, media reports, and other influences.

“This uncertainty and resulting deposit volatility can be exacerbated by end customer confusion related to inaccurate or misleading representations of deposit insurance by a crypto-asset-related entity,” it noted.

At the same time, deposits that are supposed to represent stablecoin reserves could be affected by shifts in demand for stablecoins, investor confidence in the stablecoin arrangement, and issuers’ reserve management practices, the alert said.

Finally, deposit flows could also be affected by close interconnections between crypto firms, which may intensify liquidity risk.

The regulators stressed that banks should rely on existing risk management practices to address these heightened risks — such as actively monitoring their liquidity risks and establishing controls that match them, factoring these risks into their contingency funding planning (including liquidity stress testing), and ensuring robust due diligence and ongoing monitoring of crypto-related deposits.