• Federal Reserve outlines step-by-step process for banks considering crypto-related activities.
• Despite efforts to add controls to crypto activities, several senators still believe crypto-related activities pose too great a risk for national banks and federal savings associations.

Overview of the Federal Reserve Supervisory Letter

On August 16, the Federal Reserve issued a supervisory letter providing guidance to regulated banking organizations engaged or seeking to engage in crypto-related activities. The letter points to risks of crypto activities and notes that the Federal Reserve closely monitors Fed-member banks’ participation in those activities.

According to the Federal Reserve’s guidance, prior to engaging in activities involving cryptocurrencies, banks should have adequate systems in place, risk management, and controls to conduct such activities in a safe and sound manner and consistent with applicable laws, including consumer protection statutes. Fed-regulated banks should also contact their lead supervisory contact at the Federal Reserve to help evaluate the permissibility of the activities and determine whether regulatory filings are required.

The Federal Reserve’s letter generally is consistent with Interpretive Letter #1179 issued by the Office of the Comptroller of the Currency (OCC) in November of 2021, which clarified authority of national banks and savings associations to engage in certain crypto activities. The OCC letter requires regulated institutions to notify the agency and receive their supervisor’s nonobjection before proceeding, while the Federal Reserve letter simply states that banks will receive additional information after notifying their lead supervisor.

Challenges for Banks Engaging in Crypto Activity

The Federal Reserve’s letter comes on the heels of a letter from Senators Elizabeth Warren (D-MA), Dick Durbin (D-IL), Sheldon Whitehouse (D-RI), and Bernie Sanders (I-VT) on August 10 pressuring acting Comptroller of the Currency Michael Hsu to withdraw a series of interpretive letters related to bank crypto activities. The senators objected to the grandfather clause in the most recent letter issued by acting Comptroller Hsu allowing banks already engaged in crypto activities to continue without seeking supervisory nonobjection. The three previous OCC letters were issued under then acting Comptroller Brian Brooks and clarified that banks have legal authority to engage in crypto-related activities, including providing custody services, holding deposits backing stablecoin, and using stablecoins for payments activities. Since the issuance of these letters, some U.S. banks have increased activities in these areas and several nonbank companies offering these services have sought to become federal banks. Several states allow similar activities banks chartered in those states.

Legal Permissibility for Banks and Implications

Prior to engaging in new activities of any kind, a supervised banking organization must ensure that such activities are legally permissible. A supervised banking organization seeking to engage in (or currently engaged in) crypto-related activities should analyze the permissibility of such activities under relevant state and federal laws and determine whether any filings are required under federal banking laws, including the Bank Holding Company Act, Home Owners’ Loan Act, Federal Reserve Act, Federal Deposit Insurance Act, or the regulations promulgated pursuant thereto.

While the OCC and Federal Reserve letters point to the permissibility of crypto activities in the commercial banking system, pressure to limit crypto activity in the federal banking system will likely continue. Banks should monitor the evolving circumstances closely, including potential legislation before the end of this session of Congress which could affect their authority to engage in certain crypto activities, such as minting or holding reserves for stablecoins. Absent any Congressional activity, experts expect federal regulators to continue closely scrutinizing crypto-related activities of the institutions they oversee and to seek or assert authority over related institutions.

Put Patomak’s Crypto Expertise to Work 

Patomak has deep experience in helping banks and other financial institutions assess emerging risks related to public policy developments and market opportunities in the digital assets space. Contact us to learn how Patomak can help you navigate these challenges and help you meet your business goals.

Links

• Supervisory Letter from the Federal Reserve to all banking organizations
• Press Release: Senators Warren, Durbin, Whitehouse, and Sanders Ask OCC to Rescind and Replace Cryptocurrency Guidance.
• Letter from Senators Warren, Durbin, Whitehouse, and Sanders to the OCC.
• OCC Interpretive Letter #1179 (Hsu): Chief Counsel’s Interpretation Clarifying (1) Authority of a Bank to Engage in Certain Cryptocurrency Activities; and (2) Authority of the OCC to Charter a National Trust Bank.
• OCC Interpretive Letter #1170 (Brooks): Authority of a National Bank to Provide Cryptocurrency Custody Services for Customers.
• OCC Interpretive Letter #1172 (Brooks): Chief Counsel’s Interpretation on National Bank and Federal Savings Association Authority to Hold Stablecoin Reserves.
• OCC Interpretive Letter #1174 (Brooks): Chief Counsel’s Interpretation on National Bank and Federal Savings Association Authority to Use Independent Node Verification Networks and Stablecoins for Payment Activities.