The Federal Reserve’s Withdrawal of Supervisory Letters: A Turning Point for the Crypto Industry
The Federal Reserve Board has officially withdrawn two key supervisory letters issued to US banks in 2022 and 2023, marking a huge turning point for the crypto industry. According to the announcement, the Board would rather focus on monitoring crypto-related activities using the normal supervisory process.
The Details of the Story
On August 16, 2022, the Federal Reserve Board issued a letter to all banking organizations under its supervision, asking them to notify their “leading supervisory point of contact at the Federal Reserve” before engaging in any crypto-related activities. In the letter, the various institutions were also cautioned to verify the legal position of crypto-related activities under federal or state laws before making such moves.
Fast-forward to August 8, 2023, another letter was issued to banks, providing them with the “description of supervisory nonobjection process” in their journey of engaging in tokens that are denominated in the national currencies and issued using distributed ledger technology.
In that letter, state banks were asked to demonstrate whether they have “established appropriate risk management practices” for such activities before obtaining written notification of supervisory nonobjection.
Prior to that, the “major banking regulators, the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation” had jointly issued a letter, highlighting the risks involved with crypto assets. According to that letter, there are dangers of contagion, lack of maturity in its governance structures, etc.
Based on the agencies’ current understanding and experience to date, 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.
The Current Crypto Decision by the Federal Reserve Board
Today, the Federal Reserve Board has rescinded both the 2022 and 2023 supervisory letters. What this means is that banks are no longer required to notify their leading supervisory point of contact. Additionally, the Board has withdrawn from the two statements issued in 2023, together with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.
Concluding its statement, the Board disclosed that there could be further engagement with agencies for additional guidance, not to stifle innovation, but to encourage it. Most interestingly, these decisions occurred following the resignation of an anti-crypto Fed official, Michael S. Barr, as highlighted in our earlier blog post.
Recently, the OCC also backtracked from the Agency’s policy, claiming crypto asset holdings are now permissible for national banks and federal savings associations. As detailed in our previous news brief, it also rescinded the requirements for financial institutions under its watch to improve banking access to crypto.
Prior to that, the OCC and the Consumer Financial Protection Bureau (CFPB) had signalled improvement and a significant change in how the banking system interacts with the crypto industry, as also featured in our previous article.