- The Fed’s focus on banks’ involvement in crypto underscores ongoing efforts by regulators to mitigate crypto exposure within the banking sector.
- The novel program seeks to both encourage financial innovation and address potential risks.
The Federal Reserve has intensified its scrutiny of banks’ involvement in the realm of digital assets. This marks another stride by U.S. regulators to rein in the banking sector’s exposure to cryptocurrencies.
The central bank has declared the establishment of a program aimed at oversight of digital assets among the financial institutions under its purview. Over the past year, regulatory bodies have issued repeated warnings to banks about the potential risks associated with crypto.
Program amplifies scrutiny of digital asset and stablecoin operations
The newly initiated program will scrutinize banks’ direct engagements and their partnerships with fintech companies offering services to their customers. The Federal Reserve stated,
“The goal of the novel activities supervision program is to foster the benefits of financial innovation while recognizing and appropriately addressing risks to ensure the safety and soundness of the banking system.”
Howard Fischer, a partner at New York’s Moses Singer law firm, said,
“The fear is that engagement with such volatile assets could put the traditional banking sector at risk.”
He suggested that this perspective is unlikely to evolve unless the digital asset space becomes subject to regulations.
Furthermore, the Federal Reserve announced that state-chartered institutions must now get central bank approval before conducting transactions employing stablecoins. This directive could potentially impact the strategies of banks located in crypto-friendly states.
State-chartered banks must demonstrate the deployment of necessary controls to manage liquidity, cybersecurity, and concerns about illicit funding. These institutions are also responsible for continually monitoring these issues.
Before engaging in certain stablecoin activities, banks must contact the Federal Reserve and wait for formal regulatory approval.
This augmented scrutiny of banks reflects an ongoing effort by U.S. regulators to tread carefully in the cryptocurrency landscape. The proponents of cautious oversight emphasize that these measures are crucial to safeguarding the traditional banking system from potential shocks.
As the digital asset space continues to evolve, the challenge remains to strike the right balance between technology and robustness. The Federal Reserve’s vigilant stance reflects a larger trend as authorities globally grapple with regulating cryptocurrencies.
