In a move aimed at ensuring the safety and soundness of the banking system amid the rise of digital currencies, the Federal Reserve has unveiled a comprehensive program to oversee banks’ involvement in cryptocurrency activities, mainly focusing on their partnerships.
Under the newly announced program, state-owned banks regulated by the Federal Reserve will be required to seek approval before engaging in activities related to stablecoins. These activities encompass issuing, holding, or trading stablecoins.
To obtain approval, banks must demonstrate that they have implemented adequate safeguards and controls to mitigate potential risks associated with the rapidly evolving crypto landscape.
The Federal Reserve Board clarified that the program’s scope extends beyond mere crypto transactions. It encompasses two categories of activities: first, intricate, technology-driven partnerships with non-banking entities aimed at delivering banking services to customers; second, activities involving crypto-assets and distributed ledger technology, commonly referred to as “blockchain.”
The primary objective of this novel activities supervision program is to harness the benefits of financial innovation while proactively addressing and mitigating inherent risks. To achieve this, the program will be seamlessly integrated into the existing supervisory framework of the Federal Reserve.
Subject-matter experts from the program will collaborate with the current supervisory teams to effectively monitor banks engaged in these novel activities.
Uniform Approach To Crypto Limitations
This development augments the Federal Reserve’s commitment to achieving transparency and consistency in the evolving financial landscape. The new program is an extension of the Board’s policy statement issued on January 27th, which sought to establish a level playing field for all banks under Federal Reserve supervision, irrespective of their deposit insurance status.
In accordance with the policy statement, both insured and uninsured banks overseen by the Board will face the same limitations on activities. This consistent approach aims to prevent the potential exploitation of regulations and foster fair competition among financial institutions.
Furthermore, the Federal Reserve emphasizes that banks should not only abide by the legal framework but also ensure prudence and security in their operations. To guarantee the safe conduct of activities, robust risk management processes, internal controls, and suitable information systems are considered indispensable.
The Federal Reserve’s proactive stance is a response to the increased interest and involvement of banks in new and unprecedented activities related to crypto-assets. The recently outlined evaluation process emphasizes their commitment to assessing such activities according to established practices.
However, the Federal Reserve’s new program demonstrates a resolute commitment to balance both embracing financial innovation and safeguarding the stability of the banking system amidst rapidly evolving technological landscapes.
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