Banks To Innovate With Caution On Crypto-Asset-Related Activities

There is a need to balance crypto innovation with safeguards, and banks engaging in or planning to engage in crypto-asset-related activities should take a careful approach. This is according to Michael S. Barr, the Fed Vice Chair for Supervision. 

Barr spoke at the Peterson Institute for International Economics, Washington, D.C., on March 9, 2023, on the topic: “Supporting Innovation with Guardrails: The Federal Reserve’s Approach to Supervision and Regulation of Banks’ Crypto-related Activities”. 

Barr said the technology underlying crypto-assets could bring new functionality and efficiencies to the current U.S. payments systems by facilitating faster reconciliation, clearing, and settlement. Barr further said that the technology underlying crypto-assets could help reduce costs for traditional asset transactions and automate others through smart contracts.

Barr warned about the risks posed by crypto-assets. These include liquidity and credit risks, similar to traditional assets. Other crypto-asset risks include money laundering and terrorism financing. Barr further warned that less developed legal and regulatory frameworks and the general lack of structural protections have resulted in fraud and abuse.

On stablecoins, Barr reaffirmed that entities that issue money denominated in the U.S. dollar and draw on the trust of the Federal Reserve should be subject to federal prudential regulation and supervision.

In August 2022, the Fed published a supervisory guidance letter for banks engaging in or seeking to engage in crypto-related activities. The letter requested supervised banking organisations to analyse the permissibility of crypto-asset-related activities under the relevant state and federal laws.

The above Fed supervisory guidance letter also requested supervised banking organisations to notify their lead supervisory point of contact prior to engaging in crypto-asset-related activities. Supervised banking organisations were also requested to have adequate systems, risk management, and controls in place to conduct crypto-asset-related activities safely and soundly.

In January 2023, federal bank regulatory agencies, i.e, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency, issued a joint statement in which they pointed out key risks for banking organisations associated with crypto-assets and the crypto-asset sector. The agencies advised that they continue to monitor banking organisations’ crypto-asset-related exposures. 

This week has seen the crypto markets reacting to the news that Silvergate Bank, a crypto-friendly bank, is shutting down its operations. According to CoinGecko data, Bitcoin is trading nearly 12% down over the past seven days, at around US$21,109 at press time.