Fed Looks To Increase Oversight Of Banks’ Crypto Activities

US Central Bank Also Clarifies Procedures For Banks Dealing In Stablecoins

By: Owen Fernau Loading...

Fed Looks To Increase Oversight Of Banks’ Crypto Activities

With the launch of a new program focused on crypto assets and blockchain technology, the United States Federal Reserve is broadening its influence on crypto beyond monetary policy.

On Aug. 8, the central bank unveiled plans to “supervise novel activities in the banks it oversees.”

These activities include “technology-driven partnerships with non-banks to provide banking services,” providing custody, trading, or collateralized lending services for crypto assets, and tokenizing securities, according to a document detailing the program.

As the crypto industry has grown in influence and value, it has become increasingly intertwined with the traditional banking system, which the Fed regulates and supervises. With today’s announcement, the agency is acknowledging the impact of crypto, though it’s not yet clear whether the program will buoy or hinder the industry’s push toward broad adoption.

Stablecoin Rules

The Fed also detailed a “supervisory nonobjection process for state member banks seeking to engage in certain activities involving tokens denominated in national currencies and issued using distributed ledger technology.”

The process involves a bank notifying the Fed with a description of its proposed activity, addressing risks of all types, including operational, cybersecurity, liquidity and illicit finance risks.

After receiving the notification, the Fed will, in essence, either approve or prohibit the proposed activity.

The agency said the letter builds on a policy statement issued in January which said that uninsured and insured banks would be subject to the same limitations on activities, including crypto-asset-related activities.

Industry Impact

Crypto participants took to social media to debate whether the Fed’s announcement is a boon or a curse for the industry, or a bit of both depending on the specific project or token in question.

Nic Carter, a well-known investor who penned an influential article on the Biden Administration’s crackdown on the crypto industry, sees the Fed’s announcement as a bearish indicator.

“[The Fed] want[s] to discourage innovation/risk-taking, suppress fintechs that are gaining market share by banking riskier clients, and create barriers to entry to consolidate the industry,” he said.

Carter also interprets the Fed’s position on banks’ issuance of stablecoins as rendering the use of public blockchains to distribute the tokens impossible.

“It's a bit like saying ‘banks can issue cash via ATMs, but they need to be able to report the identities of the holders of those bills to the Fed on an ongoing basis,’” he wrote.

Others are more upbeat.

“Good step towards stablecoin issuance, and crypto rails becoming more prevalent in our banking system. Clear shift in tone from the powers that be about crypto,” said Avi Felman, principal at Golden Tree, an asset management firm.