Enter to open, tab to navigate, enter to select
Federal Reserve Establishes Programs for Oversight of Bank Crypto and "Dollar Token" Activities
Practical Law Legal Update w-040-4666 (Approx. 6 pages)
Federal Reserve Establishes Programs for Oversight of Bank Crypto and "Dollar Token" Activities
by Practical Law Finance
| Published on 16 Aug 2023 • USA (National/Federal) |
The Board of Governors of the Federal Reserve System (Fed) issued a supervisory letter announcing the creation of a program designed to enhance supervision of banks engaging in novel activities related to crypto assets, distributed ledger technology (DLT), and technology-driven partnerships with nonbanks to deliver financial services to customers. The Fed also issued a supervisory letter addressing the process for Fed supervision of bank stablecoin and "dollar token" activities.
On August 8, 2023, the Board of Governors of the Federal Reserve System (Federal Reserve Board) issued two supervisory bulletins:
- Bulletin SR 23-7, announcing the creation of the Novel Activities Supervision Program (see Novel Activities Supervision Program).
- Bulletin SR 23-8, detailing the process for member banks seeking to engage in transactions involving stablecoins or "dollar tokens" (see Nonobjection Process for Banks Conducting Stablecoin Transactions).
Novel Activities Supervision Program
In Supervisory Bulletin SR 23-7, the Federal Reserve Board announced the establishment of the Novel Activities Supervision Program, designed to enhance its supervision of banks that engage in novel activities related to crypto assets, distributed ledger technology (DLT), and complex, technology-driven partnerships with nonbanks to deliver financial services to customers. The program will focus on the following risk areas:
- Complex, technology-driven partnerships with nonbanks to provide banking services. Targeted partnerships are those in which a nonbank serves as a provider of banking products and services to end customers. These partnerships often involve technologies like application programming interfaces (APIs) that provide automated access to the bank's infrastructure.
- Crypto-asset related activities. Targeted activities include crypto-asset custody, crypto-collateralized lending, facilitating crypto-asset trading, and engaging in stablecoin/"dollar token" issuance or distribution. The risks associated with these activities have been addressed by the Federal Reserve Board in its Joint Statement on Crypto-Asset Risks to Banking Organizations and Joint Statement on Liquidity Risks to Banking Organizations Resulting from Crypto-Asset Market Vulnerabilities (see Legal Updates, Federal Banking Agencies Issue Joint Statement on Crypto-Asset Risks to Banking Organizations and US Regulators Issue Second Joint Statement to Banking Organizations on Crypto-Asset Risks).
- Projects that use DLT with the potential for significant impact on the financial system. Targeted activities include exploration or use of DLT for cases such as issuance of dollar tokens and tokenization of securities or other assets.
- Concentrated provision of banking services to crypto-asset-related entities and fintechs. Targeting member banks that concentrate on providing traditional banking activities (such as deposits, payments, and lending) to crypto-asset-related entities and fintechs.
Nonobjection Process for Banks Conducting Stablecoin Transactions
In Supervisory Bulletin SR 23-8, the Federal Reserve Board details the process for state member banks seeking to issue, hold, or transact in dollar tokens to facilitate payments to obtain supervisory nonobjection for these activities from the Federal Reserve (Fed). The process involves notification of and provision of details about the proposed activity to the bank's lead supervisory point of contact at the Fed. The bank must demonstrate to its lead supervisory point of contact at the Fed that appropriate risk-management practices for the proposed activity are established, including that it has adequate systems in place to identify, measure, monitor, and control the risks of proposed activities and the ability to do so on an ongoing basis. In reviewing requests for supervisory nonobjection, Fed staff will focus on:
- Operational risks, which include risks associated with the governance and oversight of the dollar token network, role clarity, responsibilities and liabilities of parties involved, and the transaction-validation process.
- Cybersecurity risks, which include risks associated with the network on which the dollar token is transacted, the use of smart contracts, and use of open source code.
- Liquidity risks, which include the risk that the dollar token could experience substantial redemptions in a short period of time that would trigger rapid outflows of deposits.
- Consumer compliance risks, which include risks associated with identifying and ensuring compliance with applicable consumer protection statutes and regulations that apply to the specific dollar token activity.
- Illicit finance risks, which include risks relating to compliance with the Bank Secrecy Act (BSA) and Office of Foreign Asset Control (OFAC) that require:
- customer identity verification;
- due diligence regarding the nature and purpose of the customer relationship; and
- ongoing monitoring to identify and report suspicious activity.
A member bank that has applied with its lead supervisory point of contact at the Fed for supervisory nonobjection of its stablecoin or dollar token activities should wait to receive a written notification of supervisory nonobjection before engaging in the proposed activity. After the written notification of supervisory nonobjection is obtained, the bank will continue to be subject to supervisory review and heightened monitoring of its stablecoin or dollar token activities.
For further information on bank supervision and risk governance, see Practice Notes, Bank Supervision and Examinations, and Risk Governance Standards for Large Financial Institutions.