Fed Launches New Program to Oversee Banks' Engagement in Crypto Activities

The U.S. Federal Reserve is launching a new program to oversee banks' cryptocurrency activities, and it further specifies the requirement for the lenders under its authority to obtain approval before engaging in digital asset activities.

The move, announced on Tuesday, doesn't change any of the rules for crypto banking but merely defined how the central bank intends to handle its supervision work, placing dealings with the crypto industry under the new “novel activities supervision program”, in which the Fed’s digital asset experts will work with the regulator's regular supervisory staff.

The Fed also released a more comprehensive explanation of how banks it regulates can obtain pre-approval for engaging with stablecoins. An institution that’s “issuing, holding, or transacting in dollar tokens to facilitate payments” needs to demonstrate to regulatory authorities in advance that it can do it in a “safe and sound manner” and requires formal sign-off from the Fed.

Such permission could be difficult to obtain as each bank needs to prove that it can "identify, measure, monitor and control the risks of its activities," and the Fed will be looking for vulnerabilities in areas such as money laundering, customer runs, and hacking.

The Fed's announcements, which were meant to reinforce its guidance on cryptocurrencies issued in January, come on the heels of PayPal’s news that it will launch its own stablecoin.

U.S. banking regulatory authorities have made it clear during this administration that they intend to maintain a substantial barrier between the banking system and the crypto space, but they also insist on welcoming lenders to continue experimenting under their tight supervision. The Fed stated that the new novel-activities program will notify each bank when it will conduct a review of its digital asset exposure.

"The level and intensity of supervision will vary based on the level of engagement in novel activities by each supervised banking organization," stated the regulator, adding that its new program "will help ensure that regulation and supervision allow for innovations that improve access to and the delivery of financial services."