Federal Reserve Announces Programs on Crypto-Assets and Related Tech

The Federal Reserve Board (FRB) recently announced the creation of a new, risk-focused Novel Activities Supervision Program (the Program) to enhance the FRB’s supervision of regulated banks that engage with crypto-assets and blockchain technology, and enter into complex, technology-driven partnerships with non-banks that provide banking products and services to end customers.  Specifically, the Program will focus on such partnerships, crypto-asset-related activities, projects that use blockchain technology that may significantly impact the financial system, and concentrated provision of traditional banking services like deposits and lending to crypto-asset-related entities and fintechs.  Importantly, this is part of, not separate from, the FRB’s existing supervisory structure.  Accordingly, the Program will work alongside existing FRB supervisory teams, and banks engaging in these novel activities will not be moved to separate supervisory portfolios.  Since the Program is risk-based, the level and intensity of supervision will vary based on the bank’s level of engagement with these novel activities.  This will include regular monitoring of banks engaging in such activities.  The Program also is intended to inform the FRB’s development of supervisory approaches and guidance for banks engaging in these activities.

Alongside the announcement of the Program, the FRB also announced the development of a supervisory nonobjection process (the Process) for state member banks that want to engage in certain blockchain or similar activities to facilitate payments involving tokens denominated in national currencies (designated by the FRB as “dollar tokens”).  As background, in February 2023, the FRB published a policy statement generally limiting state member banks and their subsidiaries to engaging as principal in only those activities that are permissible for national banks (subject to the same terms, conditions, and limitations as national banks regarding such activity) unless otherwise permissible for state banks under applicable law.  The OCC had previously generally recognized national banks’ authority to use blockchain or similar technologies to conduct payment activities as principal, including by issuing, holding, or transacting in dollar tokens, if the bank satisfactorily demonstrated proper controls to engage in that activity in a safe and sound manner.  Accordingly, the FRB is following suit for state member banks.  The Process permits state member banks to obtain a nonobjection from the FRB to engage in activities that the OCC permits for national banks.  The state member bank must notify its lead supervisory point of contact at the FRB of the bank’s intentions, and should include a description of the proposed activities.  As part of the Process, the bank needs to be able to demonstrate appropriate risk management practices for the proposed activities.  In evaluating whether to grant the nonobjection, the FRB will focus on certain risks, including (but not limited to) operational risks, cybersecurity risks, liquidity risks, illicit finance risks, and consumer compliance risks.  The FRB will also evaluate whether the requesting bank understands and will comply with the laws applicable to its proposed activities.  If a state member bank receives a written notification of supervisory nonobjection, it will then continue to be subject to supervisory review as well as heightened monitoring of the subject activities.