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The Fed issued two policy statements Tuesday, one establishing a program for overseeing so-called novel risks and another outlining the process for certain state-chartered banks to engage in stablecoin activity. While the agency asserted that such activities are legal, the documents also make clear that engaging with them will draw enhanced supervisory scrutiny.
"I interpret the Fed's new supervisory letters — SR 23-7 and SR 23-8 — as expressing the Fed's heightened concerns about the involvement of banking organizations in crypto-related activities," Georgetown University law professor Arthur Wilmarth said. "The Fed has given clear notice that it will apply more stringent supervisory scrutiny to Fed-supervised banking organizations that engage in those activities and especially those that have large concentrations in such activities."
Legal and policy analysts say the contents of this week's letters are thematically similar to previous guidance issued during the past several months. Like prior policy statements, they also set no hard perimeters around new activities, but emphasize their risks.
Young Kim, a regulatory lawyer at the firm Clifford Chance, said the net impact of the guidance will be a diminished interest among banks in engaging in novel activities.
"These letters are not issuing new guidance, and like letters that were issued earlier this year, seem to be singling out crypto-related activities as posing additional risks and therefore warranting further supervisory attention," Kim said. "It is contributing to the chilling effect for the banking industry."
The Fed, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency have all
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But, the details of the Fed's new requirement go even further, experts say, noting that banks are required to obtain a non-objection before even testing their capabilities to engage in stablecoin activities.
While some see the recognition that banks can legally tokenize their deposits as a promising development, there is skepticism about how many banks will actually be permitted to do so.
"We do not see this as opening the door any time soon for commercial banks to issue stablecoins," Jaret Seiberg, a financial services analyst for Cowen Washington Research Group, said. "To us, this is the Federal Reserve ensuring it will have the ability to delay and block plans by a bank it regulates to issue a stablecoin."
Seiberg sees similar issues with the other piece of guidance issued this week,
Some groups see promise in this new arrangement, particularly given the fact that the Fed intends to incorporate insights from external experts in academia and the private sector to augment its internal capabilities. But, Seiberg said, the program seems poised to become an extra layer of examination that many banks would rather do without.
"We see this as the Fed previewing an examination focus for the coming year," he said. "This may make Fed-member banks less interested in looking at crypto. And, as with the other guidance, it likely previews what to expect from the OCC and FDIC."
Kim said the explicit inclusion of distributed ledger technology, also known as blockchain, in the guidance solidified the Fed's concern about the technology, even when it is not being used for cryptocurrency activities. While the latest guidance on this front tracks with previous policies, he said some in the banking space believed regulatory sentiment toward this technology might have been evolving.
"We were hoping we would start to see a loosening up in terms of the treatment of distributed ledger technology for infrastructure, record keeping and other back-office use cases," he said. "Earlier this year, Comptroller Hsu made a speech expressing cautious optimism about permissioned systems paving the way for innovations and efficiencies. On the ground level, we haven't seen that optimism bear fruit."
Other analysts are skeptical about how impactful this week's announcement will be on banks in real terms. Karen Petrou, managing partner of Federal Financial Analytics, said because the letters mirror previous guidance so closely, it is unclear how different the newly written policy is from pre-existing practices.
"One hopes that supervisors at the Fed have long identified new activities as a point of additional risk, scrutinizing them carefully before banks size up in them," Petrou said. "This policy information tells one very little about what, if anything, new the Fed may be doing for activities that are already evident in the banking system where it has presumably taken appropriate supervisory action."
On the industry side, some say the benefits of the guidance — the requirements banks will have to meet and the acknowledgment that banks are permitted to engage in such activities — outweigh the potential chilling effects.
Martin C. Grant, global head of regulatory affairs at the digital asset service provider JST Digital, applauded the guidance and the establishment of a supervisory program specifically for novel activities.
"This is an extremely important step in that it provides greater regulatory clarity for those banks looking to custody crypto, support the use of stablecoins and engage in other activities related to digital ledger technology," Grant said. "By its actions, the Fed is acknowledging the importance of blockchain technology to the financial sector and further validates the importance of stablecoins. This should also be a welcome sign to traditional investors who have been looking for validation of the real world uses for this technology."
Ryan Miller, vice president and senior counsel of innovation policy at the American Bankers Association, said in a statement that the guidance reinforces the view that stablecoin issuers ought to be subject to the same regulatory scrutiny as banks, and the guidance's publication on the heels of PayPal's announcement that it would issue a stablecoin is particularly apt.
"The guidance coming on the heels of PayPal's announcement of its new stablecoin underscores the need for nonbanks to be subject to robust federal oversight the same way banks are," Miller said. "ABA continues to emphasize the importance of fostering an environment of consumer protection and financial stability in the pursuit of innovation."
Similarly, the Bank Policy Institute expressed measured optimism that the Fed had put policies in writing that had previously been an unspoken modus operandi.
"BPI supports efforts that encourage regulated financial institutions to responsibly explore the benefits of blockchain and other novel technologies," said Paige Pidano Paridon, BPI's senior vice president and senior associate general counsel. "Banks are subject to extensive prudential, consumer, anti-money-laundering, cybersecurity and data security requirements and, unlike nonbanks, can innovate without sacrificing safety."
