Fed: Banks must provide notification, ensure legality before banking crypto

Federal Reserve board-supervised banks looking to undertake crypto-related activities should ensure doing so is legal and have “adequate systems and controls in place” before banking crypto, according to a recent supervisory letter

According to the Fed, banks must notify the Fed and state regulators before entering the crypto sector and should ensure that their operating systems cover crypto-related operational risks — the increased chance of falling victim to hacking, fraud, theft and third-party relationships; financial, legal and compliance risks relating to anti-money laundering and sanctions requirements; and other challenges.  

“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,” the Fed stated.  

The guidance is similar to a report issued last November by the Federal Reserve, Office of the Comptroller of the Currency and FDIC. 

Federal and international financial bodies have often focused on the risks they see from the crypto industry. Earlier this year, the Financial Stability Board, an international body including many of the world’s major economies, found that the rapid growth of the industry could threaten global financial stability. The FSB cited the markets’ scale, increasing interconnectedness with the traditional financial system, and structural vulnerabilities in its assessment. 

Despite those assessments, the crypto market continues to remain strong. As reported by CNBC, Bitcoin briefly surpassed $25,000 on Aug. 14 to hit its highest point since mid-June. Cryptocurrencies moved higher in the last month, correlating with a 12 percent rise in the tech-heavy Nasdaq. Still, Bitcoin is down 48 percent year-to-date.

While regulators in the Biden administration have been cautious in allowing banks to serve the crypto industry, Senate Committee on Banking and Urban Affairs Ranking Member Pat Toomey (R-Pa.) has expressed support for crypto banking. He alleged in an Aug. 16 letter to FDIC Acting Chair Martin Gruenberg that the FDIC could be “improperly taking action to deter banks from doing business with lawful cryptocurrency-related companies.”   

Some banks are already serving the crypto industry. Last year, Tulsa, Okla.-based Vast Bank became the first nationally-chartered, FDIC-insured bank to allow customers to buy, sell and hold cryptocurrencies through its user interface. JPMorgan Chase, Morgan Stanley and Goldman Sachs have dedicated groups for cryptocurrency and its underlying blockchain technology. JPMorgan has more than 200 employees working in its Onyx division.