Fed expands cryptocurrency oversight

The Board of Governors of the Federal Reserve System advised banks within its jurisdiction to notify their Federal Reserve supervisors before engaging in any crypto-asset-related activity to "ensure such activity is legally permissible and determine whether any filings are required under applicable federal or state laws."

Scott Talbott, senior vice president, government affairs at the Electronic Transactions Association, noted the ETA and member organizations support the Fed's additional oversight. "We applaud the Fed for providing some much-needed guidance on incorporating crypto into the existing payments landscape," he said. 

In a letter dated Aug. 16, 2022, titled "SR 22-6 / CA 22-6: Engagement in Crypto-Asset-Related Activities by Federal Reserve-Supervised Banking Organizations," and signed by Michael S. Gibson, director, Division of Supervision and Regulation, and Eric S. Belsky, director, Consumer and Community Affairs division, stated banks must have strong risk management, consumer protection and regulatory compliance controls in place before seeking permission for crypto-asset-related engagement. Rules apply to all banking organizations supervised by the Federal Reserve, the Fed noted, even smaller entities with $10 billion or less in consolidated assets.

Crypto opportunities and threats

"The emerging crypto-asset sector presents potential opportunities to banking organizations, their customers, and the overall financial system; however, crypto-asset-related activities may pose risks related to safety and soundness, consumer protection, and financial stability," Fed representatives wrote, noting that crypto-asset refers to any digital asset implemented using cryptographic techniques.

Given the heightened and novel risks posed by crypto-assets, the Federal Reserve said it is closely monitoring banking organizations' participation in crypto-asset-related activities, citing the following examples:

• Technology and operations: The technology underlying crypto-assets is nascent and evolving, and poses novel risks such as those associated with cybersecurity and governance of the underlying network and any related arrangements. These risks are particularly heightened when the underlying technology involves open, permissionless networks.

• Anti-money laundering and countering of financing of terrorism: Crypto-assets can be used to facilitate money laundering and illicit financing. Some crypto-assets have limited transparency, making it difficult to identify and track ownership.

• Consumer protection and legal compliance: Crypto-assets pose significant consumer risks such as those related to price volatility, misinformation, fraud, and theft or loss of assets. In addition, banking organizations engaging in crypto-asset-related activities face potential legal and consumer compliance risks stemming from a range of issues, including, for example, uncertainty regarding the legal status of many crypto-assets; potential legal exposure arising from consumer losses, operational failures, and relationships with crypto-asset service providers; and limited legal precedent regarding how crypto-assets would be treated in varying contexts, including, for example, in the event of loss or bankruptcy.

• Financial stability: Certain types of crypto-assets, such as stablecoins, if adopted at large scale, could also pose risks to financial stability including potentially through destabilizing runs and disruptions in the payment systems.

Fed representatives urged stakeholders to implement appropriate risk management systems to mitigate threats such as hacking, fraud, and theft and third-party relationship, financial, legal and compliance risks. These systems, they noted, would include but not be limited compliance with the Bank Secrecy Act, anti-money laundering requirements, and sanctions requirements.

They also encouraged state members to notify their state regulators prior to engaging in any crypto-asset-related activity, promising to provide relevant supervisory feedback in a timely manner and directing member banks to distribute the letter to their supervised banking cohorts and appropriate supervisory staff and direct any questions to the Federal Reserve Board's public website, federalreserve.gov .

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