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U.S. Federal Reserve Enhances Oversight on Crypto Activities in Banks

The finance sector has seen a surge in the adoption and integration of digital assets and blockchain technology. As these innovations continue to reshape the financial landscape, regulatory bodies are taking steps to ensure that the integration of these technologies into the banking sector is both safe and sound. One such regulatory body, the U.S. Federal Reserve, has recently made significant announcements regarding its approach to overseeing crypto activities in U.S. banks.

The U.S. Federal Reserve has initiated a new program aimed at enhancing the supervision of banks’ engagement with cryptocurrency and related technologies. This programme, known as the Novel Activities Supervision Program, is not introducing new regulations for crypto banking. Instead, it provides a clearer framework on how the central bank plans to oversee these activities. The program places crypto dealings under a new category termed “novel activities,” where specialised experts in digital assets from the Federal Reserve will collaborate with the regulator’s regular supervisors.

One of the primary clarifications provided by the Federal Reserve is regarding banks’ interactions with stablecoins. Banks under the Federal Reserve’s jurisdiction that wish to engage in activities such as issuing, holding, or transacting in dollar tokens for payment purposes will need to obtain prior approval. This approval process will require banks to demonstrate their capability to manage the risks associated with such activities effectively. The Federal Reserve will be particularly vigilant about potential vulnerabilities related to money laundering, risks of customer runs, and threats from hackers.

This move by the Federal Reserve is in line with its previous crypto guidance issued earlier in the year. The central bank’s announcements aim to strengthen the barrier between the traditional banking system and the rapidly evolving crypto sector. However, it’s worth noting that while the Federal Reserve seeks to maintain a robust oversight mechanism, it does not intend to stifle innovation. Banks are encouraged to continue their explorations in the crypto space, albeit under close supervision.

The Novel Activities Supervision Program has been designed with a risk-focused approach. It will complement existing supervisory processes, ensuring that the oversight of novel activities in banking is strengthened. The programme will monitor various activities, including:

(a) Complex technological partnerships with non-banks to offer banking services.

(b) Activities related to crypto-assets, such as custody, lending, and trading.

(c) Projects utilising distributed ledger technology (DLT) that could significantly impact the financial system.

(d) Concentrated banking services provided to crypto-related entities and fintech firms.

The Federal Reserve’s approach to this program is collaborative. Instead of creating separate supervisory portfolios for banks engaged in novel activities, the programme will operate within existing frameworks. The level of supervision will be determined based on each bank’s level of engagement in these novel activities.

The overarching objective of the program is to strike a balance between encouraging financial innovation and ensuring appropriate risk management practices. This is crucial to maintain the safety and integrity of the banking system. The Federal Reserve will also engage with external experts from various fields, including academia, banking, finance, and technology, to stay updated on emerging trends and challenges.

As the finance sector evolves with the integration of new technologies, regulatory bodies like the U.S. Federal Reserve are taking proactive steps to ensure that these changes benefit the economy and consumers while safeguarding the stability of the banking sector. The Novel Activities Supervision Programme is a clear sign of Federal Reserve’s commitment to fostering innovation while ensuring that the associated risks are effectively managed.

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