U.S. federal institutions clarify banks can still offer crypto services

U.S. federal institutions clarify banks can still offer crypto services

On Thursday, the three U.S. federal institutions responsible for regulating the banking industry — the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve — clarified that banks are neither prohibited nor discouraged from providing cryptocurrency-related services.

Although it is not forbidden, the institutions also issued warnings about the risks associated with cryptocurrency transactions and recommendations on the best practices for risk management in the newly emerged industry.

The recommendations suggested that financial institutions observe established risk management procedures when dealing with crypto assets.

The governmental institutions insisted that banks are not forbidden or discouraged from serving any particular group of customers as long as they act within the boundaries of laws and regulations.

“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,” the institutions said in a statement.

Despite this, regulatory authorities have asserted that cryptocurrencies are more vulnerable to “liquidity risks” than traditional industries.

This vulnerability is due, in part, to the “unpredictability” of deposits and withdrawals, especially those made for the tangible benefit of a cryptocurrency entity’s customers. “Periods of stress, market volatility and related vulnerabilities” in the crypto-investment sector might affect the stability of the deposits, “which can be exacerbated by misleading representations from an entity related to FDIC insurance.”

For example, customers’ knee-jerk reactions to market news and uncertainty can cause banks to experience sudden, massive withdrawals of funds.

The regulatory authorities also warned about the volatility of deposits linked to stablecoin reserves. They noted that factors like stablecoin demand, holders’ trust in the stablecoin arrangement and issuer reserve management practices could all influence the reliability of such deposits.

In that regard, the regulatory authorities urged banks to learn about the factors that cause fluctuations in customer deposits and the “interconnectedness” of liquidity risks associated with crypto investments.