US state banks will need to get a written supervisory non-objection before engaging in any issuance, holding or transaction of cryptocurrency, including dollar tokens, according to a new directive issued by the US Federal Reserve.
The banks will be required to demonstrate, to the satisfaction of Federal Reserve supervisors, that it has controls in place to conduct the activity in a safe and sound manner.
As per the new direction, a bank wishing to engage in dollar token transactions will need to intimate its Fed supervisory contact of its intention to do the same, and the supervisory contact may follow up with the bank to seek additional information to better understand the proposal and the control framework that the bank has put in place. The bank will further be under strict monitoring by the Fed in regards to these activities.
To obtain a written notification of supervisory nonobjection, a state member bank should demonstrate that it has established appropriate risk management practices for the proposed activities, including having adequate systems in place to identify, measure, monitor, and control the risks of its activities, and the ability to do so on an ongoing basis.
The Fed’s move comes as part of its regulatory action on all things crypto, according to ex-SEC official John Reed Stark, and is aimed at the likes of PayPal which recently launched PYUSD stablecoin, which is backed by dollar deposits, US treasuries and cash equivalents.
These regulatory guidelines would be challenging for banks as they will have to showcase their ability to identify, measure, monitor and control the related risks that money laundering and cybersecurity vulnerabilities would pose. Additionally, Fed will also test banks’ capacity to control substantial redemptions in a short period of time and their cybersecurity infrastructure.
“The Fed’s new supervisory program is also designated to oversee the activities of the banks it supervises relating to blockchain technology and tech-driven non-bank partnerships, with the aim of complementing its existing supervisory process and strengthening the oversight of tech-driven activities,” Reed Stark said.
The objective of the programme is to have an oversight over banks while providing them a balance of financial innovation and risk management practices, he stated.
The aim of the programme is similar to the role of regulatory bodies like the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) that have increased their activities to regulate crypto related activities by financial institutions.
The financial institutions venturing into the crypto industry like PayPal with its PYUSD stablecoin, will have to navigate through regulatory norms to ensure compliance while trying to gain trust of both regulator and consumers.
(Edited by : Pradeep John)
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