The Federal Reserve recently outlined that state-member, non-FDIC-insured banks looking to engage in novel banking activities, including work with the crypto industry, will face the same requirements as insured banks.
“This principle of equal treatment helps to level the competitive playing field among banks with different charters and different federal supervisors, and to mitigate the risks of regulatory arbitrage,” the Fed said in a Jan. 27 report.
Banks looking to serve crypto customers must have internal controls and information systems to ensure the work is safe. “Today’s action would not prohibit a state-member bank, or prospective applicant, from providing safekeeping services, in a custodial capacity, for crypto-assets if conducted in a safe and sound manner and in compliance with consumer, anti-money laundering and anti-terrorist financing laws,” the Fed stated.
The report was released the same day as the Fed denied Cheyenne, Wyo.-based Custodia Bank’s request to become a member of the Federal Reserve System. Custodia is one of multiple crypto firms that have received non-depository state charters and sought access to Fed master accounts without the strictures FDIC-insured banks adhere to.
“[Custodia’s] novel business model and proposed focus on crypto-assets presented significant safety and soundness risks,” the Fed stated in rejecting the application. “The board has previously made clear that such crypto activities are highly likely to be inconsistent with safe and sound banking practices. The board also found that Custodia’s risk management framework was insufficient to address concerns regarding the heightened risks associated with its proposed crypto activities.”
Federal regulators have repeated their concerns about banks servicing the crypto industry over the past 12 months. Last month, the FDIC, Office of the Comptroller of the Currency and Federal Reserve Board of Governors highlighted the risks present in crypto-assets, including their volatility, risk of fraud and legal uncertainties. Though they did not explicitly call on banks to avoid the industry, they said exposure to the crypto sphere “is highly likely to be inconsistent with safe and sound banking practices.”
The Biden administration has called on Congress to expand regulatory oversight of the crypto space and tighten transparency and disclosure requirements for cryptocurrency companies. The administration also asked Congress to strengthen penalties for violating illicit finance requirements and ban crypto intermediaries from tipping off criminals.
Rebeca Romero Rainey, president and CEO of the Independent Community Bankers Association of America, supported the recommendations from both the Federal Reserve and Biden administration. “Policymakers should prioritize protecting national security amid ongoing instability in the crypto markets while collaborating on a comprehensive regulatory framework that utilizes more effective alternatives to a U.S. central bank digital currency — including the FedNow instant payments service,” she added.