Federal Reserve Launches New Supervisory Program to Oversee Crypto and Nonbank Partnerships

Earlier this month, the Federal Reserve announced the launch of a new supervisory program for the banks it supervises to oversee activities surrounding cryptocurrency, distributed ledger or blockchain technology, and tech-driven relationships with nonbanks. The program aims to ensure that risks related to innovation and “novel activities” are addressed appropriately.

“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,” the Fed stated, as reported by Banking Dive. The Fed also said that the intensity of oversight will be based on both risk and the level of engagement each firm has in novel activities.

The Fed outlined novel activities as partnerships where a nonbank provides banking products and services to customers, typically involving technologies that allow automated access to the bank’s infrastructure. Crypto-asset custody, facilitating crypto-asset trading, crypto-collateralized lending, and engaging in stable coin distribution will also be supervised.

Additionally, novel activities include the use or exploration of distributed ledger technology for uses like issuance of dollar tokens or tokenization of securities. The program will oversee banking organizations focused on providing traditional banking services such as payments, deposits, and lending to crypto-asset-related fintechs.

The central bank wants the program to be informed by diverse backgrounds in risk management and supervision. It “will incorporate insights and analysis from real-time data, market monitoring, horizontal exams and proactive, intentional, and regular information exchange across portfolios, federal bank regulatory agencies, and other stakeholders.”

Any banks supervised by the Fed must get the regulator’s approval before holding, transacting, or issuing dollar tokens. Additionally, state member banks planning to engage in novel activities must prove to the Fed that they have proper controls to safely conduct the activity.