As the most recent action by US regulators to restrict banks’ involvement in cryptocurrency, the Federal Reserve announced it is intensifying scrutiny of lenders’ involvement in digital assets.
On Tuesday, the Fed announced that it has established a programme to improve the supervision of activities involving digital assets and blockchain technology by the lenders it regulates. Over the past year, the central bank and other regulators have frequently urged lenders to be cautious of the asset class’s risks.
The programme would also emphasize banks’ collaborations with non-lenders, such as fintech firms, to provide services to customers. The purpose of the novel activities supervision programme, according to the Fed, is to stimulate the benefits of financial innovation while recognizing and effectively addressing risks to safeguard the safety and soundness of the banking system.
In January, the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency outlined their worries regarding the risky asset class. Officials stressed the need of preventing uncontrollable risks from entering the banking sector.
Federal officials have since implemented regulations that many proponents of cryptocurrencies claim are detrimental to the asset class. Watchdogs rejected a crypto firm’s bid to join the Fed system in addition to issuing more stern warnings.
According to Howard Fischer, a lawyer at the law firm Moses Singer in New York, there is concern that dealing with such volatile assets could endanger the traditional banking industry. Unless the digital asset market is more rigorously regulated, he continued, this opinion is not likely to alter.
The Fed also stated on Tuesday that before issuing, holding, or engaging in stablecoin transactions to facilitate payments, state-chartered banks must have approval from the central bank. The action may have an impact on the plans of lenders with operations in states that are still governed by the central bank but are regarded as being more pro-crypto.
According to the new regulations, state-chartered banks regulated by the Fed would have to show that they have the proper measures in place to manage risks, such as those related to liquidity, cybersecurity, and illegal finance.
They would also have to demonstrate that they can keep an eye on those problems. Before engaging in certain stablecoin operations, the lenders would have to notify the Fed and wait until they had written confirmation of supervisory nonobjection before moving forward.
