The US Federal Reserve has issued a supervisory letter titled: “SR 22-6 / CA 22-6: Engagement of Federal Reserve Banking Organizations in Crypto-Asset Activities”. The letter requests formal notification of current and future activities related to cryptoassets from all Federal Reserve banks and from all other banks regulated by the Federal Reserve.
The final group of banks regulated by the Fed includes “state-chartered member banks, bank holding companies, foreign branches of U.S. national banks and member banks, Edge Act corporations, and U.S. branches and state-chartered agencies of foreign banks” — according to the San Francisco Federal Reserve Board. This supervisory notice also includes all banks that manage total consolidated assets of $10 billion or less.
According to this oversight letter, banks will be required to notify their “principal supervisory point of contact at the Federal Reserve before engaging in any activity related to crypto-assets. Any supervised banking organization already engaged in cryptocurrency-related activities should immediately notify its lead supervisory point of contact at the Federal Reserve regarding its engagement in such activities, if it has not already done so.
Federal Reserve supervisory staff will provide relevant feedback to oversight, as appropriate, in a timely manner.” The Fed is not the first US banking authority to request such information. In July of this year, the Federal Deposit Insurance Corporation, another primary regulator of US banks, also asked its banks for similar reports on their current and future plans for cryptocurrency-related activities.
The Federal Reserve’s letter notes the various opportunities for banks engaged in activities related to cryptoassets, but also the associated risks that these banks may have. These risks include, but are not limited to, safety and soundness, consumer protection and financial stability. There are also potential vulnerabilities related to bank technology and operations, AML/CFT practices and compliance with laws and regulations.
The letter goes on to explain that:
“Before engaging in any activity related to crypto-assets, a supervised banking organization must ensure that such activity is legally permitted and determine whether requirements have been filed under applicable federal or state laws. A supervised banking organization should, before engaging in these activities, have in place adequate systems, risk management and controls to conduct such activities in a safe and sound manner and in compliance with all applicable laws, including applicable consumer protection statutes and regulations.”
In the quote above, the Fed is clear: all banks that have current or future plans for activities related to cryptoassets – such as providing custody services or other related activities – must have top compliance protocols in place. In addition, these banks must have implemented satisfactory thorough and robust risk management and mitigation procedures.
The Fed’s recent letter goes into further detail by expanding on the necessary risk mitigation procedures required before banks can engage in any crypto-asset-related activities. The Fed’s letter specifies that “these systems should cover operational risk (for example, the risks of emerging technologies; the risk of hacking, fraud, and theft; and the risk of third-party relationships); financial risk; legal risk; compliance (including, but not limited to, compliance with the Bank Secrecy Act, anti-money laundering requirements and sanctions), and any other risk necessary to ensure that activities are conducted in a manner consistent with safe and sound banking and in in accordance with the applicable law.”
Australia to complete ‘token mapping’ exercise.
The Australian government will begin the first token mapping exercise of its kind as part of a wider drive to strengthen regulatory oversight of the crypto-asset market. Australia – like many global regulatory leaders – has long called for greater clarity in the rules governing the proliferating digital economy. The process of token mapping is defined as “discovering the characteristics of all digital asset tokens [in Australia] including delineating the type of crypto asset, its underlying code and any other defining technological features,” according to Sydney Morning Herald.
Australia will be the first government entity in the world to conduct a token mapping study as part of the research and development process for its regulatory framework. If successful, other governments may emulate or replicate this decision by the Australian government.
The Treasurer of the Commonwealth of Australia issued a press release on this research activity last week. The announcement states that:
“The Australian Taxation Office estimates that more than one million taxpayers have interacted with the crypto asset ecosystem since 2018. As it stands, the crypto sector is largely unregulated, and we need to do some work to strike the right balance so we can embrace new and innovative technologies while protecting consumers.
Our government is ready to start consultation with stakeholders on a framework for industry and regulators, which allows consumers to participate in the market while better protecting them”.
As a first step in the reform agenda, the Treasury will prioritize work on “token mapping” in 2022, which will help identify how crypto assets and related services should be regulated. This has not been done anywhere else in the world, so Australia will become a leader in this business.”
He notes that once the token mapping work is complete, he will release a public consultation document shortly thereafter.
The statement also highlights the current government’s belief that “the previous government dealt with the regulation of cryptoassets, but jumped right into the options too soon without first understanding what was being regulated”. This is a concern shared by many in the crypto industry in multiple jurisdictions where regulatory arbitrage appears to be an increasingly prevalent problem.
Finding the right balance between being proactive and doing thorough background due diligence is something that many regulators globally also struggle with. Of course, timely and effective policy making do not necessarily have to be mutually exclusive activities. But identifying the appropriate middle ground between these two demands and skilled policy makers as well as private sector stakeholders who proactively engage and communicate with their regulators.
Indonesia halts registration of new cryptocurrencies
The Central Bank of the Philippines – The Bangko Sentral ng Pilipinas (BSP) – on August 10 – announced a three-year moratorium on the issuance of new licenses for virtual asset service providers. And now Indonesia’s Commodity Futures Trading Regulatory Agency (Bappebti) – the country’s primary crypto regulator – has also announced that it will not issue new licenses for crypto exchanges in the country.
The news was announced in the recent Bappebti Circular No. 208, signed by the government earlier this month. The Bappebti circular states the agency’s broader policy and regulatory goals for “transparent, efficient and effective crypto asset trading activities with fair competition to protect the interests of all parties in the crypto trading market.”
Unlike the Philippines, where they specifically stated that the moratorium would last for three years, it remains unclear whether the Indonesian government will reverse this decision. And if they do decide to reverse it, it remains unknown when that will be. For now, 25 regulated exchanges for cryptocurrency trading are registered in the country.
Financial services, law enforcement regulations