Michael Barr: Deposits From Crypto Firms Put Banks at Increased Risk for Liquidity

  • Michael Barr believes crypto price volatility makes them an unlikely substitute for fiat such as the US dollar.
  • The Vice Chair of Supervision at the Federal Reserve called for more regulations on stablecoins before they pose a significant risk to the financial system.
  • The US is moving closer to regulating the crypto industry, but regulators are struggling to classify crypto assets appropriately.

 Vice Chair of Supervision at the Federal Reserve, Michael Barr, issued a warning to banks accepting deposits from cryptocurrency firms, advising them to become aware of and address the “heightened liquidity risks” involved. Barr made this comment during his speech at a Wednesday Fintech Week 2022 event in Washington, D.C.

The Vice Chair of the Federal Reserve Supervision noted that the price fluctuations in the crypto industry have contributed to stress and have potential risks for banks exposed to the system. He said,

The recent volatility in crypto markets has demonstrated the extent of centralization 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 organizations.

Speaking further on the implications for banks, Barr added,

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.

Furthermore, Barr noted that false statements made about deposit insurance by crypto-asset companies could mislead customers and lead to increased withdrawals from banks that offer deposit services to crypto-asset firms and their clients during challenging conditions.

 Barr revealed that the Fed is working with the Office of the Comptroller and the Federal Deposit Insurance Committee to resolve such problems and ensure risks are properly handled. He further stated, “there are additional types of crypto-asset-related activities where the Fed may need to provide guidance to the banking sector in the coming months and years.”

Barr, in his speech, emphasized that cryptocurrencies are unlikely to replace fiat currencies such as the dollar due to their extreme price volatility. The Federal Reserve personnel, however, stated that stablecoins are a more “stable” asset and “have greater capacity to function as privately issued money.”

Stablecoins, according to the Federal Reserve Vice Chair of supervision, must be regulated before they pose a significant risk to the system. 

Lawrence Woriji Verified

Lawrence has covered some exciting stories in his career as a journalist, he finds blockchain-related stories very intriguing. He believes Web3 will change the world and wants everyone to be a part of it.

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