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According to a supervisory letter, US banks should notify the Federal Reserve before they engage in crypto-related activities.
The letter outlines the steps Fed-supervised banks should take prior to engaging in crypto-asset-related activities.
It stresses that it is the banks’ obligation to assess whether the activities they are planning to engage in are legally permissible and determine whether they should make any regulatory filings.
Fed-supervised banks, which include state chartered banks that are members of the Fed, various foreign banks, bank holding companies and designated financial market utilities, should also notify the central bank prior to engaging in crypto activities.
The letter stresses that crypto services “may pose risks related to safety and soundness, consumer protection, and financial stability”.
Before offering a crypto service, supervised banks should “have in place adequate systems, risk management, and controls to conduct such activities in a safe and sound manner and consistent with all applicable laws, including applicable consumer protection statutes and regulations”.
These systems should be able to “identify, measure, monitor, and control” the risks associated with such activities on an ongoing basis.
Banks should monitor operational risk, including the risks of new, evolving technologies, the risk of hacking, fraud and theft, and the risk of third-party relationships. They should additionally monitor financial risk, legal risk, compliance risk, such as compliance with anti-money laundering (AML) requirements and sanctions requirements, and other risks, for instance, those relating to consumer protection statutes.
“[B]efore a bank begins to engage in or offer crypto-asset-related services, it must seriously and carefully consider the risks involved — both to the bank and its customers,” Fed governor Michelle Bowman stressed in a speech the following day.
“The recent turmoil in the digital-asset industry only underscores that point.”
Bowman has previously cautioned against potential risks involved in crypto activities and called on financial institutions to consult with their primary regulator before offering a crypto product.
“We understand that everyone involved in this space is seeking clarity.
“One of the most important tools that we have as a regulator is the ability to clearly articulate our supervisory expectations.”
Fed staff are currently working to lay down supervisory expectations for banks on a variety of digital asset-related activities, Bowman said.
These “expectations” will cover topics such as the custody of crypto-assets, facilitation of customer purchases and sales of crypto-assets, loans collateralised by crypto-assets, and issuance and distribution of stablecoins by banking organisations.
Earlier this week, the Fed issued guidance setting out a transparent process that regional reserve banks should follow when they review requests by crypto firms and fintech to access federal reserve accounts.
Although the guidelines provide long-awaited clarity over how the review process works, Bowman stressed it is only the first step and more work needs to be completed before a process is established to fully implement the guidelines.
