The Federal Reserve recently detailed the process banks must take to enter the crypto sphere. In an Aug. 8 letter, the Fed announced that banks must account for risks relating to their operations, cybersecurity, liquidity, consumer finance and illicit finance prevention work.
“To obtain a written notification of supervisory non-objection, 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 agency stated.
Also on Aug. 8, the Fed announced that it had launched a program to scrutinize banks’ work with crypto companies. The program is expected to focus on “complex, technology-driven partnerships with nonbanks”; crypto-collateralized lending, custody and trading; and projects that use digital ledger technology “with the potential for significant impact on the financial system.”
The initiative will include leaders from around the Federal Reserve System, and engage outside experts in academia, finance, banking and technology. The Federal Reserve plans to periodically update which banks should be subject to enhanced scrutiny. “The program 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,” the Fed stated.
Though not explicitly calling on banks to not work with crypto, the Federal Reserve has warned banks that exposure leaves them at greater risk of falling victim to scams and fraud. In a Jan. 3 report, the Fed, FDIC and the Office of the Comptroller of the Currency said that exposure to the crypto sphere “is highly likely to be inconsistent with safe and sound banking practices.”
In January, the Federal Reserve Board of Governors rejected Wyoming-based Custodia Bank’s application for membership because of the digital bank’s reliance on crypto and its lack of safety measures to prevent a run on deposits. Custodia Bank has sued the Board of Governors and the Federal Reserve Bank of Kansas City for denying it access to the central bank’s payment system.