Recent volatility in cryptocurrency markets has put a spotlight on some potential risks for banks, the Federal Reserve’s Michael S. Barr said in a speech Wednesday (Oct. 12).
Barr, the Fed’s vice chair for supervision, made his remarks before an audience at D.C. FinTech Week in Washington.
“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 deposit fluctuations that are correlated and closely linked to broader developments in crypto-asset markets,” Barr said.
He added that misrepresentations regarding deposit insurance by crypto-asset firms can lead to customer confusion and increased withdrawals at banks that provide deposit services to crypto-asset firms and their customers during times of stress.
Barr said the Fed is attempting to spotlight these issues for banks, stressing the importance of understanding some of the “heightened liquidity risks” they may face from certain types of deposits from crypto-asset companies.
“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 ensuring risks are appropriately managed.”
Barr said there are other types of crypto-asset-related activities where the Fed may need to provide guidance to banks in the months and years ahead.
The speech came days after remarks by Cleveland Federal Reserve President Loretta Mester, who said even if the United States does not create a central bank digital currency (CBDC), the Fed’s study of the technology will be beneficial.
Read more: Study of Digital Dollar Beneficial Even if CBDCs Never Happen
Speaking at the 2022 Chicago Payments Symposium, Mester said that “given the evolving digitalization of the financial system,” research and experimentation on the underlying technologies of a digital dollar will yield “insights that will not only help inform a future decision on a CBDC but also aid our current work on faster payments, interoperability between payment systems, and payment system resiliency.”
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