Banks Should Back Deposits From Crypto Customers With Cash: US Agencies

 According to the statement, it is recommended that banks do not use deposits from cryptocurrency customers for lending purposes and instead keep enough cash reserves to fully support all deposited funds.

Once again this week, financial regulators in the US collaborated to emphasize to banks the significance of addressing the potential risks of cryptocurrencies. However, as of now, no fresh obligations have been mandated.

The Federal Reserve, FDIC, and OCC emphasized the importance of conducting thorough risk assessments for firms, but clarified that their recent statement does not introduce any novel policies. Instead, the statement serves as a reminder to banking organizations to adhere to established risk management principles in their dealings with cryptocurrencies.

Banks need to take into account the risks associated with deposit concentration, interconnection, and potential liquidity issues. Additionally, it is recommended that businesses carry out thorough due diligence and continuous monitoring of all cryptocurrency-related activities.

The recent announcement made on Thursday is a follow-up to the earlier warning released by the three organizations in January. According to the updated statement, the main focus of the agencies is on the potential risks of instability and liquidity on exchanges and the reserves of stablecoins, and banks must take the necessary measures to address these concerns. In addition, regulators have advised banks not to provide loans using the deposits made by crypto customers and to maintain adequate cash reserves to support all deposits.

According to Galaxy Digital analysts, the regulators' follow-up statement can be viewed as positive because they explicitly stated that they are not prohibiting banks from banking cryptocurrency. This clarification is seen as a slight deviation from their previous guidance and provides more clarity. However, analysts also noted that this statement may just be a proactive measure against future policy changes. Congress and the SEC are scrutinizing the industry more closely, and banks may soon have to comply with new guidelines.

The level of examination regarding crypto's access to the banking system intensifies. During a Senate hearing, Lee Reiners, who is the policy director of the Duke Financial Economics Center, advised legislators to separate digital assets from financial institutions. In his testimony, Reiners suggested that "all possible measures" should be taken to prevent crypto from entering the banking system. Banks are also beginning to respond to this sentiment, as Signature Bank, which is known for being crypto-friendly, ended its relationship with Binance, a long-term client, last month. Additionally, Custodia's second attempt for Fed supervision was declined unanimously on Thursday.

The dispute has led Custodia to file a lawsuit against the Fed Board and its Kansas City branch. Galaxy analysts believe that it is important to determine if banks are truly experiencing pressure and if the actions taken by banking regulators have affected their risk tolerance frameworks. This includes assessing whether banks providing services to the crypto sector have sufficient clarity or are discouraged from doing so.