- The Fed Board intends to supervise “novel activities” within the banking sector.
- Fed supervision aims to foster financial innovation while balancing associated risks.
- The supervisory program marks a significant development in digital asset regulation.
The US has been a hotbed for regulatory concerns around cryptocurrencies in 2023. Recent action has seen authorities, including the Securities Exchange Commission (SEC), Department of Justice (DOJ), and the Commodities Trading Futures Commission (CFTC), dish out enforcement action against leading crypto firms.
On August 8, the Fed’s Board of Governors announced plans to create a supervisory program overseeing “novel activities” related to crypto assets and blockchain technology.
In the proposal, the Board acknowledged the benefits of financial innovation but urged caution over the potential impact of digital assets on the safety and protection of the banking sector.
The Fed’s Crypto Oversight
The Novel Activities Supervision Program intends to expand the role of the existing Fed supervisory staff by including oversight of the novel activities of banking organizations.
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This entails staff working alongside program experts to manage entities involved with cryptocurrencies. However, details of the supervision, such as the processes involved in assessing risk or industry consultation on issues raised, were not given.
The Board stated that the level of supervision would depend on an entity’s degree of engagement in novel activities – with four specific activity areas singled out for supervision:
- Non-banking institutions provide financial products and services to retail users, including application programming interfaces (APIs) that link to banking infrastructure.
- Crypto custody, lending, trading, and stablecoin issuance.
- Exploration or use of digital ledger technology (DLT), including stablecoins and asset tokenization.
- Banking services to crypto-related companies.
The motivation behind the program appears to stem from fears that the current supervisory approach will prove insufficient to counter the potential risks of greater legacy integration.
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“Given the novelty of these activities, they may create unique questions around their permissibility, may not be sufficiently addressed by existing supervisory approaches, and may raise concerns for the broader financial system,” the proposal read.
It was noted that under the program, the Fed neither prohibits nor discourages banks from dealing with crypto activities.
War on Crypto?
Despite the Fed’s assurances of neutrality, the crypto industry continues to reel from a spate of enforcement actions and regulatory snubs.
In the last six months alone, the SEC has filed several high-profile cases against market leaders such as Binance and Coinbase over allegations of operating unregistered exchanges, among other charges.
In response to a series of crypto banking snubs in February, Partner at Castle Island Ventures, Nic Carter, opined of a coordinated effort to marginalize the industry by cutting off access to banking infrastructure.
Carter likened the situation to Operation Choke Point, a Department of Justice program beginning in 2013, in which businesses operating in undesirable sectors, such as gambling and firearms, were choked off from banking services. Authorities were criticized for not following due process and making ideological determinations, infringing people’s right to choose.
On the Flipside
- The Novel Activities Supervision Program could create barriers discouraging banks, particularly smaller players, from integrating and embracing crypto activity, hindering adoption.
- The House Financial Services Committee recently passed the ‘Clarity for Payment Stablecoins Act 2023,’ which provides a regulatory framework for stablecoin issuance to foster greater financial innovation in the US.
Why This Matters
The Fed’s increased scrutiny of banks’ crypto activities is a significant step forward in the battle for clearer guidelines. The program suggests that authorities have accepted that crypto is not going away and are laying the groundwork for greater legacy integration.
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