Fed to Ratchet Up Oversight Into Banks’ Crypto Activity

America’s central bank is the latest U.S. regulator to increase cryptocurrency sector oversight.

The Federal Reserve Board on Tuesday (Aug. 8) released new information on its plan to supervise “novel activities,” a term that includes partnerships with non-banks, as well as crypto and blockchain-related activity.

“The goal of the novel activities supervision program is to foster the benefits of financial innovation while recognizing and appropriately addressing risks to ensure the safety and soundness of the banking system,” the Fed said in a news release.

The program will be “risk-based,” the Fed’s policy statement said, with the level and intensity of supervision depending on each bank’s level of engagement in novel activities.

In addition, the Fed says that state-chartered banks need its approval before issuing, holding or transacting in stablecoins for payments.

To get that approval, the Fed says, banks need to show they have set proper risk management practices, “including having adequate systems in place to identify, measure, monitor, and control the risks of its activities.”

Those risks include cybersecurity, consumer compliance, liquidity and illicit finance risks.

The Fed’s announcement comes amid what was recently described here as a “humbling” 12 months for the crypto sector.

“The alternative value-transfer vehicle, which was supposed to revolutionize the traditional financial system with democratized and trustless access to digital assets, instead enabled one of the biggest financial frauds in U.S. history — the failure of FTX, which spurred a sector-wide crackdown by the U.S. Securities and Exchange Commission (SEC),” PYMNTS wrote.

There are also indications the next 12 months could be even rougher. Already, the sector is facing persistent scrutiny from regulators. Both the SEC and the Commodity Futures Trading Commission (CFTC) have gone after major players — such Coinbase, the largest crypto firm in the U.S., and Binance, the largest crypto company in the world — with existential lawsuits.

Meanwhile, PYMNTS noted, “U.S. banking regulators have issued warnings to the traditional financial sector around the pitfalls of providing much-needed banking services to America’s crypto players.”

Against this backdrop, companies have begun to shed their American crypto operations, including British FinTech Revolut, who announced this week it was doing just that.

And last week, GameStop announced it would end support of its digital asset wallets starting Nov. 1, a decision born out of “regulatory uncertainty of the crypto space.”