Why The Fed Will Require Banks To Report Crypto Activity

The U.S. Federal Reserve (Fed) issued a letter on banking institutions participating in crypto-related activity and potentially adopting digital assets. The financial institution claimed that the nascent asset class “poses a risk” to the current financial system and to consumers investing capital in the sector.

In that sense, the Fed wants all U.S. banks and financial institutions under their supervision to notify them of activities or if they are looking to engage in crypto-related activities. The financial institution claims, as many other legislators, regulators, and high-ranking government officials in the U.S. government, that digital assets have a number of potential vulnerabilities.

The Fed claims that the underlying technology powering crypto is “nascent and evolving” and could pose a “novel risk” in matters related to cybersecurity. In addition, the financial institution argued that cryptocurrencies are a tool that allegedly facilitates money laundering and illicit financing.

On the latter, the Fed failed to provide metrics that support their claims. Other high-ranking U.S. government officials and the U.S. Department of Treasury recently acknowledged that most of the activity with digital assets is “licit”.

Despite these statements, the U.S. government has continued to target the nascent asset class. The main reasons are related to consumer protection and legal compliance including price volatility, fraud, and loss of assets.

For banking institutions engaging in crypto-related activities, the risk could be greater as they could face “legal and consumer compliance risks” from regulatory uncertainty regarding some crypto assets and potential lawsuits from the loss of capital. The sector has seen many of the latter in recent months as main cryptocurrencies trend to the downside.

However, the same risk could be attributed to any companies or entities operating in the legacy financial system. The Fed’s main concerns seem related to the potential for digital assets to disrupt the system if “adopted at large scale”.

Is Crypto A Risk To The Entire Financial System?

In that sense, the financial institution claims that it will monitor activity in the sector and activity associated with banking institutions under their supervision. The Fed said:

(…) a Federal Reserve-supervised banking organization engaging or seeking to engage in crypto-asset-related activities should notify its lead supervisory point of contact at the Federal Reserve. (…) prior to engaging in any crypto-asset-related activity, a supervised banking organization must ensure such activity is legally permissible and determine whether any filings are required under applicable federal or state laws.

Banking institutions already engaged in crypto-related activity should, the Fed said, notify and put in place a system to mitigate the alleged aforementioned risks. This includes compliance with the Bank Secrecy Act, Anti Money Laundering, and sanctions imposed by the U.S. government.