Crypto agency deposits pose ‘heightened liquidity dangers’ for banks, Fed’s Barr says

Federal Reserve Vice Chair of Supervision, Michael Barr warned that banks taking in deposits from cryptocurrency companies ought to come to grasp and handle the “heightened liquidity dangers” concerned, he mentioned Wednesday at a Fintech Week 2022 occasion in Washington, D.C.

“The latest volatility in crypto markets has demonstrated the extent of centralization and interconnectedness amongst crypto-asset corporations, which contributes to amplified stress,” he mentioned in his ready speech. “Whereas banks weren’t straight uncovered to losses from these occasions, these episodes have highlighted potential dangers for banking organizations.”

In an effort to assist to deal with these points and guarantee dangers are appropriately managed, Barr mentioned the Fed is collaborating with the Workplace of the Comptroller and the Federal Deposit Insurance coverage Committee.

“Wanting forward, there are extra forms of crypto-asset-related actions the place the Fed may have to offer steering to the banking sector within the coming months and years,” he mentioned.

Later in his remarks, Barr highlighted that cryptos are unlikely to grow to be a substitute to fiat currencies just like the U.S. greenback as a consequence of their distinctive value volatility, although stablecoins, that are digital tokens that signify a extra “steady” asset, “have larger capability to perform as privately issued cash.”

Nonetheless, it is vital to kind a robust regulatory framework for prudential oversight of stablecoins, as they may pose a threat to monetary stability, he added. In different phrases, it is too early to name stablecoins a medium of change given an absence of regulatory readability.

Beforehand, (Oct. 1) banks’ crypto publicity sits at solely 0.1%.