US: Fed issues guidance for banks considering crypto activities

The US Federal Reserve Board has provided additional information for banking organisations engaging (or seeking to engage) in crypto-asset-related activities, stating that banks were to notify the central bank prior to engaging in such assets.

The emerging crypto-asset sector presents potential opportunities to banking organisations, their customers, and the overall financial system. However, it might also pose risks related to safety and soundness, consumer protection, and financial stability.

The supervisory letter issued by the Fed on Tuesday outlines the steps that Board-supervised banks were to take — prior to engaging in crypto-asset-related activities — such as assessing whether such activities were legally permissible, and determining whether any regulatory filings were required.

The letter added that banks ought to have adequate systems and controls in place to conduct cryptocurrency activities in a safe and sound manner.

Crypto trade assumes relevance, as various financial institutions and central banks have also been flagging concerns about the financial risks attached to virtual currency trade platforms, like cryptocurrency.

Reserve Bank of India Governor Shaktikanta Das had recently said that cryptocurrencies were a clear danger.

The nature and scale of crypto markets are evolving rapidly, and if the current trends continue, they will pose risks to financial stability, the European Central Bank had stated earlier.

It is important to note that the price of the widely-traded digital asset Bitcoin has dropped sharply from its all-time high over the past several months, turning investors poorer. Most other prominent crypto-assets too have experienced steeper declines recently.

The Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, will report to the G20 finance ministers and central bank governors in October, on the regulatory and supervisory aspects of stablecoins and other crypto-assets. It is working to ensure that crypto-assets are subject to robust regulation and supervision.

"Crypto-assets, including [the] so-called stablecoins, are fast-evolving. The recent turmoil in crypto-asset markets highlights their intrinsic volatility, structural vulnerabilities and the issue of their increasing interconnectedness with the traditional financial system," the Board had said.

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