Federal Reserve Launches A Supervision Program for Cryptocurrency and Technological Partnerships

Last week, the Federal Reserve announced the initiation of a fresh supervisory initiative aimed at overseeing the activities of banks under its jurisdiction concerning cryptocurrency, distributed ledger technology, blockchain, and technological collaborations with nonbank entities, reported Payments Dive.

This program is designed to work in conjunction with the existing supervisory procedures of the central bank, with the primary objective of enhancing the oversight of unconventional activities carried out by supervised banking institutions, as stated by the Federal Reserve.

The establishment of this program has been prompted by the regulator's concern for addressing the potential risks associated with innovative endeavors. The Federal Reserve expressed that its intention behind instituting the novel activities supervision program is to promote the advantages of financial innovation while also duly acknowledging and managing the risks to ensure the stability and robustness of the banking system.

The range of new activities outlined by the Federal Reserve encompasses:

• Collaborations where nonbank entities offer banking services and products to end consumers, often involving technologies such as application programming interfaces that facilitate automated access to a bank's infrastructure.

• Undertakings like custody of crypto-assets, lending backed by crypto collateral, facilitating trading of crypto-assets, and involvement in the issuance or distribution of stablecoins or dollar tokens.

• Exploration or application of distributed ledger technology for various purposes, including the issuance of dollar tokens and the tokenization of securities or other forms of assets.

• Banking institutions primarily focused on delivering conventional banking services like deposits, payments, and lending to entities involved in crypto-assets and fintech.

The level of scrutiny applied by the Federal Reserve to its supervision will be determined based on the risk and extent of involvement in innovative activities exhibited by each firm.

Moreover, the central bank expressed its desire for this program to be informed by diverse perspectives and the best practices in risk management and supervision. Involvement of external experts from academia, as well as the banking, finance, and technology sectors, is planned as part of the program's engagement strategy. The Federal Reserve intends to incorporate real-time data analysis, market monitoring, comprehensive examinations, and proactive information exchange among portfolios, federal banking regulatory bodies, and other stakeholders.

Furthermore, the Federal Reserve clarified that any state-affiliated bank under its supervision must receive approval from the regulatory authority before engaging in the issuance, possession, or transacting of dollar tokens, like stablecoins, for the purpose of facilitating payments. State member banks desiring to participate in such activities are required to demonstrate to the Federal Reserve their implementation of controls that ensure the safe and prudent conduct of these activities.