Bank regulators issue a joint statement on the safety and reliability of crypto activities – Fin Tech

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the situation: Since clarifying the legal permissibility of certain crypto activities in 2020 and early 2021, federal banking agencies have begun to tighten regulatory oversight of such activities, alerting banks to applicable risks, imposing procedural checks on their initiation, and emphasizing the importance of engaging in these activities in a safe and reliable manner .

The result: January 3, 2023 The Federal Reserve, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) issued a joint statement expressing skepticism that certain activities related to crypto assets can be conducted in a safe and reliable manner in the current time. They further emphasized the importance of preventing the migration of risks associated with the crypto asset sector into the banking system.

A look ahead: While the crypto-asset-related activities addressed by the OCC’s earlier interpretations are still legally permissible for banks, the agency’s view that some of these activities are “highly likely to be inconsistent with safe and sound banking practices” does narrow the path to pass for banks who want to participate in them. It is not clear whether the agencies will issue further guidance or direction to banks participating in or considering engaging in such activities.

In recent years, certain banks have expressed interest in either engaging in crypto-asset-related activities or providing banking services to crypto-asset companies. Some crypto asset companies have applied for or received banking charters. The OCC issued a number of interpretive letters in 2020 and early 2021, acknowledging that national banks are legally permitted to provide custodial services for cryptocurrencies, hold stablecoin reserves, participate as nodes in distributed ledgers, and use stablecoins. The OCC has also approved the conversion or conditional lease of several banks engaged in activities related to crypto assets.

Since then, however, the OCC and other banking agencies have adopted a more conservative approach. In a subsequent interpretive letter, for example, the OCC emphasized the fact that all banking activities, including those related to crypto-assets, must be conducted in a safe and sound manner, and directed banks to request “no objection” from supervision before include in all activities related to crypto assets. During 2022, the Federal Reserve and the FDIC followed suit, issuing guidance documents that also directed banks to request advance notice before engaging in these activities and noted that regulators would provide “relevant supervisory feedback.”

The Joint Statement on Crypto-asset Risks for Banking Organizations (the “Statement”) is the agencies’ most explicit and clear articulation of their policy approach to crypto-asset-related activities. Consistent with past guidance and in response to market developments in 2022, the agencies identify a number of risks associated with these activities in the Statement, including fraud, abandonment risk, and immature risk management and governance practices. Accordingly, the agencies note the importance of preventing the migration of risks associated with the crypto asset sector that cannot be mitigated or controlled into the banking system.

The statement goes beyond previous guidance in expressing the agencies’ current views on safety and reliability:

Based on the agencies’ current understanding and past experience, the agencies believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network or similar system is highly likely to be inconsistent with safe and sound banking practices. .

This conclusion could be interpreted as applicable to some activities previously identified by the OCC as legally permissible, as well as other crypto activities on which the OCC (or other banking agencies) have yet to issue a public opinion. The agencies also state that they have “significant concerns about the safety and soundness of business models that are concentrated in crypto-asset-related activities or have concentrated exposure to the crypto-asset sector.” Despite the disclaimer that banks are not prohibited or discouraged from providing banking services to customers of any specific class or type, the Statement raises doubts as to whether there is a viable way forward for banks to engage in crypto-asset-related activities or serve crypto-related businesses on anything other than in a limited way.

These blanket statements of safety and soundness set the bar high for banks wishing to engage in these activities. They pose, rather than answer, a series of questions: (1) What does “safety and reliability” mean in the context of crypto activities, including traditional banking activities such as custody, payments and deposits? (2) Who is responsible for the definition – the bank, its regulators or both? (3) Are banks currently involved in crypto activities behaving in an unsafe or unsound manner? (4) What about banks that provide traditional banking services to crypto companies? Given the confidential nature of the oversight process and the lack of detail and clarity in the joint statement, the public can only speculate, and banks are likely to be discouraged from conducting crypto activities.

Two key conclusions

  1. The Federal Reserve, the FDIC, and the OCC stated that issuing or holding crypto-assets is “highly likely to be inconsistent with safe and sound banking practices,” and that they have “significant concerns about the safety and soundness of business models that are concentrated in crypto-asset-related activities or have concentrated exposure to the crypto asset sector.”

  2. Banks should be cautious about whether and how to continue with crypto activities or serve crypto companies and be prepared for criticism from supervisors.

The content of this article is intended to provide a general guide to the subject. Expert advice should be sought regarding your specific circumstances.

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