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On August 8, the US Federal Reserve published two significant instructions regarding the issuance – and engagement – of digital assets by its member states’ banks. It’s hard to overstate the importance of Fed guidance.
As the central bank of the United States and the prudential regulator of banks and bank holding companies, it has primacy among regulators and will set the tone for others in the universe.
While these guidelines may not propose many material changes to existing regulations, they provide much-needed clarity in the currently murky cryptoregulatory waters. Such clarity has long been sought by the industry and is needed to promote growth and institutional adoption by traditional Fed-regulated financial institutions.
Breaking changes
The first guidance issued by the Department of Supervision and Regulation – SR 23-8 / CA 23-5: No Objection Supervisory Process for Member Banks Seeking to Engage in Certain Activities Involving Dollar Tokens – clearly states that member banks must receive a letter supervisory objection before engaging in any stablecoin activity, including testing.
In order to receive this no-objection letter, banks must demonstrate that they have established appropriate risk management practices for the proposed activities, with particular emphasis on those related to:
- operational risks;
- cyber security risks;
- liquidity risks;
- illegal financial risks; and
- consumer compliance risks.
The second part of the guidelines – SR 23-7: Creating a program to monitor new activities – establishes a program to address “new activities related to crypto-assets, distributed ledger technology (DLT) and complex, technology-driven partnerships with non-banks to provide financial services to clients”. The program will not be independent, but will supplement the existing monitoring processes.
In addition to providing a regulatory structure related to banks that deal directly with digital assets, the program will address the concentrated provision of banking services to entities related to cryptoassets and fintechs, including banks that provide traditional services such as deposits, payments and lending to entities related to crypto asset.
This is particularly noteworthy, as it signals potentially increased oversight of entities providing fiat services to the digital asset sector and may have an impact on crypto-native firms’ ability to access banking – whether this impact is positive or negative remains to be seen. .
Exposure to decentralized finance
One thing is certain, it puts banks on notice that they can have a significant connection to the decentralized financial system, regardless of whether there are direct participants or not.
By providing fiat on-ramps and off-ramps services, as well as providing the traditional financial sector infrastructure required for full economic integration, banks act as conduits for digital assets and pass-through entities that must implement tailored compliance solutions to reduce their risk exposure to sector. No doubt that will be the Fed’s expectation and that their monitoring program for new activity will focus closely on those issues.
While some have reacted with trepidation to the announcement, it could actually be an opportunity for digital asset firms with mature compliance programs and entrenched compliance cultures to better understand their obligations, partner with traditional financial services firms and access institutional clients and investors .
Either way, it’s always better to know where you stand and have a clear path to compliance than to sit in regulatory limbo in constant fear of the unknown.
Regulation US regulators and government
