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US banks have to notify Federal Reserve before engaging in crypto activities

federal reserve

As banks accelerate their involvement in the crypto-asset sector, the Federal Reserve has fired a warning shot across their bows. It issued a letter requiring all banks to assess the legality and risks associated with their crypto-asset activities and inform their point of contact at the Federal Reserve in advance.

Any banks already participating in crypto-assets have to do the same if they haven’t already. It also encouraged state banks to contact their state regulator.

“Given the heightened and novel risks posed by crypto-assets, the Federal Reserve is closely monitoring related developments and banking organizations’ participation in crypto-asset-related activities,” says the document

The letter starts on a positive note recognizing the potential opportunities of crypto-assets for banks and their customers, but the remainder focuses on the risks. This includes cybersecurity, anti-money laundering, consumer protection and financial stability risks.

Regarding technology, apart from cybersecurity, it also mentions network governance. “These risks are particularly heightened when the underlying technology involves open, permissionless networks,” says the letter.

The document describes crypto-assets very broadly as any digital asset that uses cryptographic techniques. We might be splitting hairs, but we’d differentiate between tokenized bank money and stablecoins. The former wasn’t explicitly referenced in the letter’s list: “Crypto-asset-related activities may include, but are not limited to, crypto-asset safekeeping and traditional custody services; ancillary custody services; facilitation of customer purchases and sales of crypto-assets; loans collateralized by crypto-assets; and issuance and distribution of stablecoins.”

Meanwhile, earlier this week, the Federal Reserve issued guidelines on how it will assess which banks can access master accounts for banks with ‘novel’ charters, which would include those in the crypto sector.