US Federal Reserve start oversight program for crypto

The ‘novel activities supervision program’ to keep tabs on transactions involving digital assets, including crypto; program focuses on lenders’ fitness to have appropriate safeguards in reducing risks.

Original story by Allyson Versprille and Katanga Johnson for Bloomberg

The Federal Reserve said it is stepping up scrutiny of lenders’ involvement in digital assets, the latest move by the US regulators to limit banks’ involvement in crypto.

The Fed said Tuesday it had set up a program to strengthen oversight of activities involving digital assets and blockchain technology by the lenders it oversees. Over the past year, the central bank and other regulators have repeatedly warned lenders to be wary of risks associated with the asset class.

The program will also focus on banks’ partnerships with firms that aren’t lenders, such as fintech companies, to provide services to customers.

“The goal of the novel activities supervision program is to foster the benefits of financial innovation while recognizing and appropriately addressing risks to ensure the safety and soundness of the banking system,” the Fed said in a statement.

According to the official Fed guidelines, the program will ‘enhance the supervision of novel activities conducted by supervised banking organizations, through the following activities:

• Complex, technology-driven partnerships with non-banks to provide banking services – Partnerships where a non-bank serves as a provider of banking products and services to end customers, usually involving technologies like application programming interfaces (APIs) that provide automated access to the bank’s infrastructure.
• Crypto-asset related activities – Activities such as crypto-asset custody, crypto-collateralized lending, facilitating crypto-asset trading, and engaging in stablecoin/dollar token issuance or distribution.
• Projects that use DLT with the potential for significant impact on the financial system – The exploration or use of DLT for various use cases such as issuance of dollar tokens and tokenization of securities or other assets.
• Concentrated provision of banking services to crypto-asset-related entities and fintechs – Banking organizations concentrated in providing traditional banking activities such as deposits, payments, and lending to crypto-asset-related entities and fintechs.

The Fed, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency in January detailed concerns with the volatile asset class. Officials said it was important that risks that can’t be controlled aren’t allowed to migrate to the banking system.

Since then, federal regulators have put in place policies that many crypto backers have said are hostile to the asset class. In addition to increasingly direct warnings, watchdogs denied a crypto firm’s application to become a member of the Fed system.

“The fear is that engagement with such volatile assets could put the traditional banking sector at risk,” said Howard Fischer, a New York-based partner at the law firm Moses Singer. That view is unlikely to change unless the digital-asset space is regulated more like traditional financial firms, he said.

The Fed also said Tuesday that state-chartered banks must get the central bank’s sign off before issuing, holding or transacting in stablecoins to facilitate payments. The move could affect the plans of lenders based in states that are considered to be more friendly to crypto, but that are still overseen by the central bank.

Crypto has faced intensified regulation in the United States this year. Recently, a US court has ruled US-based crypto XRP as a class of security, but only conditionally. Additionally, the US Securities and Exchange Commission outlined new rules for crypto platforms to disclose material cybersecurity incidents within four days.

Learn more about the new guidelines issued by the US Federal Reserve in the original Bloomberg report here https://www.bloomberg.com/news/articles/2023-08-08/espn-signs-sports-betting-deal-with-penn-entertainment#xj4y7vzkg