Banks need to manage heightened risks from crypto firm deposits, says Fed’s Barr

Michael Barr, the Federal Reserve’s vice chair of supervision, says banks that accept deposits from cryptocurrency companies should be aware of increased liquidity risks.

Michael Barr, the Federal Reserve’s vice chair of supervision, commented that banks and other financial institutions that accept deposits from cryptocurrency companies should take note of increased liquidity risks.

Barr said this in a speech on Wednesday. He added that the Federal Reserve is working with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp to pinpoint some of the risks to banks concentrating their deposits in the crypto industry.

He further warned that banks could experience deposit fluctuations linked to price swings affecting the broader cryptocurrency market. Barr said;

“The recent volatility in crypto markets has demonstrated the extent of centralisation and interconnectedness among crypto-asset companies, which contributes to amplified stress. While banks were not directly exposed to losses from these events, these episodes have highlighted potential risks for banking organisations.”

Barr added that the engagement of banking regulations with financial institutions on the risks of accepting deposits from crypto firms isn’t designed to discourage the banks from providing crypto companies access to banking services.

Instead, the move is designed to ensure that any risks are appropriately mitigated, he added. 

This is the first time Barr is commenting on cryptocurrencies since assuming the top regulatory post at the Fed in July.

The Fed vice-chair said regulators need to balance supporting innovation with providing guardrails that protect consumers and also protect systemic risks. 

He warned that cryptocurrency companies making misrepresentations about deposit insurance could confuse consumers in the space, and this could lead to increased withdrawals at crypto-aligned banks that provide such services during turbulent times. 

His comments come two months after the US Federal Reserve Board warned banks and other financial institutions looking to engage in crypto-related activities or offer such services to ensure they are familiar with the necessary regulatory requirements and guidelines.

The cryptocurrency market has been in a bear trend since the start of the year, with Bitcoin down by more than 65% from the all-time high it achieved a year ago.