FED Issues Guidance on Crypto Activities

The central bank of the United States (FED) issued guidance on the engagement in crypto-asset-related activities by banks, in another step towards adoption.

The FED Looking to Regulate Crypto Activities

The Board of Governors of the Federal Reserve System (FED), which acts as the central bank of the United States, issued a guide providing additional information for banks engaging or seeking to engage in crypto-related activities.

The FED states that crypto-assets pose potential opportunities for banks, their customers, and the financial system. But these opportunities do not come without risks to safety and soundness, consumer protection, and financial stability:

• Technology and operations: technological innovation of crypto and blockchain is a source of operational risks because of the use of new technology, the increase of cybersecurity threats, and the novelty of network governance. This risk is higher with open and permissionless networks.

• Anti-Money Laundering and financing of terrorism: authorities in the US and around the world have long been vocal on the risks surrounding the use of crypto to circumvent Anti-Money Laundering rules. The lack of transparency and the use of protocols such as Tornado Cash have contributed to perpetuate the idea that crypto is mainly used in criminal activities. 

• Consumer protection: crypto-assets have a higher risk of price volatility, false information, fraud, and asset theft or loss. 

• Compliance: the ambiguity surrounding the applicable regulation exposes consumers to losses and operational failures. Consumers may also be harmed in the event of insolvency or bankruptcy of the crypto-assets services providers.

• Financial stability: if adopted widely, stablecoins might threaten financial stability by disrupting the payment system.

Because of these risks, the FED determines that banks intending to engage in crypto-asset-related activities must take precautionary steps to ensure that such activities are legally authorized. 

First of all, banks should notify the FED of their intention to engage in crypto activities, or, if they are already engaging in them, they must notify the FED as soon as possible. This will enable the supervisor to act in accordance with its regulatory powers and determine the appropriate action.

Secondly, before engaging in crypto-related activities, banks have to make sure that the activity in which they intend to participate is legally permitted and whether it requires compliance with certain requirements for its exercise. For example, when offering investment products with crypto-assets as underlying assets, banks will be subject to the Securities Exchange Commission’s supervision and regulation.

In any case, any bank intending to engage in crypto-related activities must have in place adequate risk management systems and controls, including consumer protection statutes and regulations. This includes procedures to continuously measure, monitor, and regulate the risks connected to such operations (including operational, new technologies, financial, and money laundering risks).

The FED will continue supervising the US banking activity and monitoring their endeavors into crypto, indicating that regulation of the crypto space is increasing.

US Crypto Adoption

The FED guidance comes less than a year after a joint statement by the US federal regulatory agencies concerning crypto-assets policies and next steps.

According to this statement, the agencies manifested their intentions of providing greater clarity throughout 2022 on whether certain crypto activities conducted by banks were legally admissible.
The adoption of crypto in the US is becoming more apparent by the day, as investment firm BlackRock announced last week the introduction of a private fund that provides its institutional clients with exposure to spot Bitcoin.