The Federal Reserve Board has warned member banks about a ban on cryptocurrency banking activity. In a recent final rule, the Federal Reserve System gave an interpretation of the Federal Reserve Act to govern digital assets in the federal banking system. This applies to state-level financial institutions overseen by 12 regional banks in the US.
Prohibition on Crypto Assets Holding
The Federal Reserve rule issues two directives for member banks. Firstly, the Board will “presumptively prohibit” banks from holding most crypto assets. Secondly, banks wishing to use dollar tokens must prove security measures and receive formal approval before using it in banking transactions. Both directives highlight the “significant risks” associated with the crypto sector, including fraud, legal ambiguity, and volatility.
Read More: U.S. regulators warned banks about crypto fraud and scams
Issuing Dollar Tokens
The rule noted that issuing dollar tokens on decentralized ledgers is also unsafe. However, banks can receive a “supervisory nonobjection” from the Board if they can demonstrate safe banking with dollar tokens. Stablecoins, also known as dollar-denominated tokens, differ from traditional cryptocurrencies as they are pegged to the US dollar, presenting lower price volatility. However, the Board believes that deploying dollar tokens still poses significant cybersecurity and operation risks, mainly related to illicit finance activities.
The Federal Reserve’s decision opens a new chapter in the regulation of the digital asset and crypto industry. The recent executive order by President Joe Biden has prompted more research into cryptocurrencies’ effect on the economy, and the security risks associated with the technology have been spotlighted by money laundering via digital assets. The Board’s decision on state bank operations with digital assets dashes hopes of incorporating cryptocurrencies into the regulated economy, as seen in the rejection of Custodia Bank’s membership as a subsidiary bank.
