The regulators have warned about deposits placed by a crypto-asset-related entity. Photo by Kanchanara on Unsplash.

Top US banking regulators have issued a joint statement warning banks on liquidity risks posed by crypto-asset-related entities. 

The Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) have asked banks to monitor such risks and have effective risk management practices in place.

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According to the agencies, the statement does not establish new risk management principles; rather, it reminds banking firms to use the existing principles.

“Banking organisations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation,” the statement read. 

Specifically, the regulators have warned about deposits placed by a crypto-asset-related entity and deposits that constitute stablecoin-related reserves. 

“Such deposits can be susceptible to large and rapid inflows as well as outflows when end customers react to crypto-asset-sector-related market events, media reports, and uncertainty,” the regulators said.

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Banks are required to regularly monitor the liquidity risks associated with such funding sources and to set up and maintain appropriate risk management and controls that are proportionate to the severity of those risks.

These regulators issued a similar warning to banks last month, cautioning them to watch out for frauds, scams, and legal ambiguities involving the custody of digital assets.

Most recently, the US Federal Reserve Board rejected the application of crypto-focused Custodia Bank citing that the firm’s risk management framework was inadequate to mitigate the risks associated with crypto activities.