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The Fed, FDIC, OCC and IMF issue warnings on crypto risks

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(Kitco News) - The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued a joint statement on Thursday warning about the liquidity risks presented by certain sources of funding from crypto-related entities and some “effective practices to manage such risks.”

“The statement reminds banking organizations to apply existing risk management principles; it does not create new risk management principles,” they said. “Banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation.”

According to the regulators, certain sources of funding from crypto-asset-related entities could potentially pose heightened liquidity risks to banking organizations “due to the unpredictability of the scale and timing of deposit inflows and outflows.”

Examples of such scenarios include deposits placed by an entity “that are for the benefit of the entity’s customers,” and deposits that constitute “stablecoin-related reserves.”

“The stability of such deposits may be driven by the behavior of the end customer or crypto-asset sector dynamics, and not solely by the crypto-asset-related entity itself, which is the banking organization’s direct counterparty,” the regulators warned, adding that market volatility and periods of high stress are things that can affect the stability of depots.

“More broadly, 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, and liquidity risk therefore may be further heightened,” the statement said.

To help combat these concerns, the regulators recommended that banking organizations which utilize these sources of funding actively monitor liquidity risks and “establish and maintain effective risk management and controls commensurate with the level of liquidity risks from such funding sources.”

Examples of practices that banks could employ to reduce risk include “Assessing potential concentration or interconnectedness across deposits from crypto asset-related entities and the associated liquidity risks; Incorporating the liquidity risks or funding volatility into contingency funding planning, including liquidity stress testing; and Performing robust due diligence and ongoing monitoring of crypto-asset-related entities that establish deposit accounts.”

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IMF pushes back against making crypto legal tender

The Executive Board of the International Monetary Fund (IMF) also released a statement on Thursday saying that cryptocurrencies should not be granted legal tender status.

“Directors generally agreed that crypto assets should not be granted official currency or legal tender status in order to safeguard monetary sovereignty and stability,” the statement said, and called for countries to clarify tax treatment and align their regulations with global standards.

This position was formulated following discussions among the 24 directors elected by the IMF’s member countries after they reviewed a board paper entitled “Elements of Effective Policies for Crypto Assets,” which they received on Feb. 8.

According to the IMF, while the potential benefits of crypto have not yet materialized, significant risks have emerged, such as “ macroeconomic risks, which encompass risks to the effectiveness of monetary policy, capital flow volatility, and fiscal risks.”

Due to these risks, they believe a comprehensive framework for dealing with cryptocurrencies needs to be agreed upon by member states.

"The growing adoption of crypto assets in some countries, the extra-territorial nature of crypto assets and its providers, as well as the increasing interlinkages with the financial system, motivate the need for a comprehensive, consistent, and coordinated response," the IMF said.

The statement highlighted the view that the widespread adoption of cryptocurrencies has the potential to undermine the effectiveness of monetary policy, circumvent capital flow management measures, and exacerbate fiscal risks.

For these reasons, the directors determined that cryptos should not be granted status as official currency or legal tender. The directors also reached a consensus on “the need to develop and apply comprehensive regulations” to crypto assets, and stressed the need for “effective implementation of the FATF standards on AML/CFT.”

In a nod to the positive potentials of blockchain technology and crypto, the statement added that regulations shouldn’t stifle innovation and that governments can benefit from the underlying digital technology.

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