Fed boosts crypto oversight of U.S. banks with new program

Marriner S. Eccles Federal Reserve Board Building – CC BY-SA

The U.S. Federal Reserve has launched a new program to monitor banks’ crypto activities. Banks under its oversight must now get approval before getting involved in digital assets.

The announcement on Tuesday doesn’t change crypto banking rules. Rather, it defines how the central bank will oversee these activities using the so-called “novel activities supervision program,” where the Fed’s digital experts will work alongside regular officials.

The Fed also clarified how banks it supervises must gain pre-approvals for working with stablecoins. If an institution is engaged in activities like “issuing, holding, or transacting in dollar tokens” for payments, it must show the supervisors that it can do so securely beforehand. Formal approval from the Fed is also required.

Obtaining that permission might be challenging, as every bank must demonstrate the ability to “identify, measure, monitor, and control the risks of their activities.” The Fed will also closely assess potential weaknesses related to money laundering, customer runs and cyberattacks.

U.S. banking regulators have been clear about maintaining a strong divide between the banking system and the crypto sector. However, they encourage banks to experiment under close supervision. The new program will inform each bank when their digital assets involvement will be reviewed.

“The level and intensity of supervision will vary based on the level of engagement in novel activities by each supervised banking organization,” wrote the Fed in an official statement.

The central bank’s declarations were intended to strengthen the crypto guidance it provided in January. Tuesday’s statement also closely followed PayPal’s stablecoin launch.

PayPal’s new stablecoin may prompt legislative talks

Ian Katz, managing director at Capital Alpha, pointed out that PayPal’s token would likely draw regulatory attention, especially from the Fed. He said the Fed is concerned about the possible long-term financial stability effects of a stablecoin tied to the U.S. dollar.

PayPal becomes the first major finance company to launch its own stablecoin. The dollar-backed stablecoin, PayPal USD (PYUSD), will be issued to the company’s platform users first. It will later extend to PayPal’s Venmo app.

This is not PayPal’s first foray into blockchain. It began serving crypto trading on Venmo in April 2021. In May this year, PayPal added the capability to transfer any cryptocurrency to external wallets.

PayPal’s move came at a crucial time, as stablecoin legislation advanced through the initial committee stage in the House of Representatives for the first time last month.

However, in the Democrat-led Senate, figures like Dem. Elizabeth Warren consider crypto as a financial threat to the general public. Dem. Sherrod Brown, who heads the Senate Banking Committee, is also skeptical of the sector.

Their concerns extend beyond crypto scams and breaches. These lawmakers worry about the risk of a major crisis in the U.S. banking system due to the widespread use of stablecoins. Additionally, they fear that customer withdrawals could disrupt the industry’s stability.

Dem. Maxine Waters, a ranking member of the House Committee on Financial Services, also expressed displeasure with the current legislation. She said it could potentially let major tech companies introduce their own tokens, which she described as “dangerous.”

Major mainstream companies’ previous attempts to launch stablecoins faced significant opposition from financial regulators and policymakers. A notable example is Facebook-parent Meta, where the Fed ultimately halted the plans for the stablecoin Libra, later known as Diem, in 2019.