Crypto’s recent volatility has shed light on the risks that digital assets can pose to banks, according to Michael Barr, vice president for oversight at the Federal Reserve.
“When a bank’s deposits are concentrated in deposits from the crypto-asset industry or from crypto-asset companies that are highly interconnected or share similar risk profiles, banks may experience fluctuations in deposits that are correlated and closely linked to broader developments in crypto-asset markets,” Barr said in a speech on Wednesday, October 12.
Read more: Crypto deposits pose ‘increased liquidity risks’ for banks: Fed’s Barr
By highlighting the issue, Barr said, the Fed aims to highlight the importance of understanding the heightened liquidity risks that certain types of crypto deposits bring to banks.
“Crypto-assets have grown rapidly over the past few years, both in market capitalization and in scope,” he said. “But recent cracks in these markets have shown that some crypto-assets are riddled with risk, including fraud, theft, manipulation, and even exposure to money laundering activity.”
Activities related to crypto assets, both in and out of federally regulated institutions, must include safeguards to ensure that crypto service providers are subject to similar regulations as other financial service providers, Barr added.
“This effort is not intended to discourage banks from providing access to banking products and services to businesses associated with crypto-assets,” he said. “Our work in this area is focused on appropriate risk management.”
Acting Comptroller of the Currency Michael Hsu said this week in a DC FinTech Week speech that there are three “lenses” through which his office seeks to identify the risks cryptocurrencies pose to banks. , consumers and the financial system.
They integrate crypto and traditional finance, with the immature crypto industry bringing potential for cross-contamination and systemic risk. Another is the lack of data, the banking regulator said, calling for more information about the interconnection and exposure between banks and crypto firms.
See: OCC Chief Michael J. Hsu Says Regulators Need to Watch 3 Crypto Risks
The third, with the crossword-friendly name ‘skeuomorphism’, means explaining new concepts by comparing them to familiar concepts that don’t mean the same thing in banking – such as ‘custody’ and ‘savings accounts’ .
Meanwhile, Hsu told CoinDesk a few days later that part of the problem is that crypto companies often don’t know what they’re actually doing.
“Part of this confusion is because there are parts of the crypto industry that don’t know what they want to be when they grow up,” Hsu said Thursday (October 13). Crypto businesses “want to be a bit of everything for everyone. And at some point, you have to decide.
This lack of clarity, he added, makes it difficult for regulators to set clear guidelines on their oversight.
hard and ugly
A stablecoin regulation bill is coming, but it’s coming hard and won’t be pretty, the top Republican congressman negotiating the law said during a DC FinTech Week panel.
“We agree on all the components of what the asset is,” Rep. Patrick McHenry (RN.C.) said on Oct. 12, according to CoinDesk. “We found a pretty ugly baby. He’s still a baby.”
The bill would set the rules of the road for stablecoins like Tether’s USDT, Circle’s USDC, and Binance’s BUSD, with the main requirement being that any stablecoin must be 100% backed by a currency. fiduciary and highly liquid investments such as short-term treasury bills.
See also: House Bill would ban algorithmic stablecoins for 2 years
While this is believed to be roughly agreed upon, there are many other areas, such as whether state-chartered financial institutions can issue stablecoins, to be settled as part of a three-way negotiation between McHenry, the senior GOP member on the House Financial Services Committee. , its chairwoman, Rep. Maxine Waters (D-California), and the Treasury Department.
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