(Liquidity Risk from Crypto Assets) AskDegree Bulletin

Bulletin No. SL-02.01122023

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Published Date: February 23, 2023

Jurisdiction - United States

OCC Bulletin - Joint Statement on Liquidity Risks to Banking Organizations Resulting from Crypto-Asset Market Vulnerabilities

Announcement date - February 23, 2023

Primary Audience - Community Banks,National Banks, Federal Savings Associations, Banking-as-a-Service Providers,Crypto - Asset Related Entities, FinTechs, Exchanges, Chief Executive Officers, Compliance Officers. 

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Summary: The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (the Fed), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the Agencies) issued a joint statement today highlighting liquidity risks to banks presented by certain sources of funding from crypto-asset-related entities and some effective practices to manage such risks.

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Crypto-asset-related activities and exposures of OCC-supervised banks continue to be viewed carefully and cautiously by the OCC. The agencies jointly warn, before engaging in certain crypto-asset-related activities, including accepting deposits from stablecoin issuers who serve as cash reserves for a stablecoin, banks must be sure to minimally follow the process outlined in Interpretative Letter 1179.2.

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Key Takeaways: 

1. Peel back the layers: The Agencies expect banks to understand both the direct and indirect drivers of the potential behavior of deposits from crypto-asset-related entities. To satisfy agency expectations, banks must require fintechs engaging in crypto-assets related business models to peel back and expose the granular layers of their flow of funds, revenue models, and risk management controls.   

2. Interconnected Risk:  Too much of a good thing can, indeed, be dangerous. Banks are charged with being intimately aware of potential concentration or interconnectedness risks associated with deposits from multiple crypto-asset-related entities. Risk must be viewed both in the silo of each individual crypto-asset-related entity and the cumulative liquidity risk from all crypto-asset-related entities on the banks books. 

3. Due diligence and testing - to infinity and beyond!: Robust due diligence, and continuous monitoring and testing performed by banks is required. Banks will ultimately need to step beyond checking policies and annual third-party compliance program audits. Oversight mechanisms must be able to uncover and assess additional risk areas, such as inadequate staffing (considering both the number of resources and tactical experience), change management,  awareness of large and minor program pivots, and the inner workings of strategic partnerships entered into by the fintech.  The OCC, and the supporting agencies through their guidance, makes it clear that having a tight handle on third-party risk management is paramount to ensuring compliance standards are maintained throughout the supply chain of financial product delivery. 

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When operating within the Banking as a Service (BaaS) space, it is always important to keep ae clos eye on what the regulatory and enforcement agencies are focusing on. Changes in focus usually lead to changes in oversight responsibilities that cascade from the partner banks down to their fintech partners and supporting third-party service providers. 

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If you are a financial services business engaged in activities impacted by crypto assets and would like to talk about your compliance strategy, in this area or elsewhere, please feel free to book a call with us today. Click here to get started.