The Federal Reserve Board (“FRB”) has announced a significant change requiring banking organizations supervised by FRB to disclose any current activity related to crypto-assets and to notify FRB before engaging in such business activities in the future. This notification requirement can add friction to banks’ adoption of crypto-asset activities. This announcement follows the OCC’s previous instruction to its supervised entities to “notify its oversight office, in writing, of its intention to engage in a range of crypto-related activities.” With a similar focus aimed at Federal Reserve Banks interacting more regularly with crypto projects, legal and regulatory compliance due diligence will be even more important.

What happened

  • On August 16, 2022, FRB sent a letter to all of its supervised banking organizations requesting those institutions to notify their primary FRB supervisory point of contact if that banking organization is engaging or intends to engage in “activities related to Crypto Assets” in order to “ensure that such activity is legally permitted and to determine whether any deposits are required under applicable federal or state laws.”
  • “Crypto-asset activities” include crypto-asset custody and traditional custodial services; auxiliary child care services; facilitation of purchases and sales of crypto-assets by customers; loans secured by crypto-assets; and the issuance and distribution of stablecoins.
  • The letter also specifically referenced stablecoins as potentially posing financial stability risks if adopted widely.

How will this affect banking organizations?

Supervised banking institutions must:

  • Make sure activities are legally permitted
    • Supervised banking organizations must assess the legality of proposed cryptoasset-related activities under state and federal laws and determine whether deposits are required under federal banking laws, including the Bank Holding Company Act, Home Owners’ Loan Act, the Federal Reserve Act, and Federal Deposit Insurance Act.
    • If eligibility is unclear, supervised banking organizations are encouraged to consult with their FRB point of contact prior to the start of these activities.
  • Notify the Federal Reserve
    • If a supervised banking organization is already engaged in crypto-asset-related activity, it must promptly disclose all activities to its primary supervising point of contact.
    • Supervised banking organizations must notify their primary supervising point of contact before engaging in any activity related to crypto-assets.
  • Adopt and maintain appropriate controls
    • FRB’s letter highlights the importance for supervised banking organizations to adopt and maintain adequate risk management and controls related to crypto-asset-related activities, including:
      • Have adequate systems in place to identify, measure, monitor and control the risks associated with crypto-related activities on an ongoing basis; and
      • Ensure that these systems cover “operational risks (e.g. risks related to new and evolving technologies; risk of hacking, fraud and theft; and risk of relationships with third parties), financial risk, legal risk, compliance risk (including, but not limited to, compliance with bank secrecy law, anti-money laundering requirements, and sanction requirements), and any other risk necessary to ensure that business is conducted in a manner consistent with safe and sound banking and in compliance with the law, including applicable consumer protection laws and regulations.
    • Consider Notifying State Regulators
      • FRB encourages member state banks to also notify their state regulators before engaging in crypto-asset related activities.

Why is this important?

  • If you are a supervised banking organization that is currently involved in active crypto-asset activities, reconfirm that your activities are compliant and review your service providers to ensure compliance;
  • If you are a potential partner of a supervised banking organization, expect an even more robust due diligence process, turnaround time may be extended, and you may face increased reporting and disclosure requirements. information; and
  • For all participants in the crypto-asset space, this is yet another example of the growing approach of all players on deck to crypto regulation spurred by the Executive Order earlier this year. . The first objective of the decree was to “protect consumers, investors and businesses”, and we expect to see further action from the FRB and other regulators.

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