Banking Regulators Issue Joint Statement on Security and Soundness of Crypto Business – FinTech

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In short

The situation: Since clarifying the legal authorization of certain crypto activities in 2020 and early 2021, federal banking agencies have begun to tighten regulatory oversight of such activities, warning banks of applicable risks, imposing procedure at their initiation and emphasizing the importance of engaging in these activities in a safe and healthy manner.

The Result: On 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 some Cryptocurrency-related assets activities can be conducted in a safe and sound manner at present. They further noted the importance of preventing risks from the crypto-asset sector from migrating into the banking system.

Future Outlook: While the activities related to crypto assets discussed in previous OCC interpretive letters may still be legally permissible for banks, the agencies’ view that some of these activities are “very likely to be incompatible with safe and sound banking practices” nevertheless narrows the way forward for banks wishing to engage in it. It is unclear whether the agencies will issue any further guidelines or directives to banks engaged in or considering engaging in such activities.

In recent years, some banks have shown interest or engaged in crypto-asset-related activities or provided banking services to crypto-asset businesses. Some crypto-asset businesses have applied for or obtained bank charters. The OCC issued a number of interpretative letters in 2020 and early 2021, acknowledging that it is legally permitted for domestic banks to provide cryptocurrency custody services, hold stablecoin reserves, participate as nodes in distributed ledgers and use stablecoins. The OCC has also approved the conversion or conditional charter of several banks engaged in crypto-asset-related activities.

Since then, however, the OCC and other banking agencies have taken a more conservative approach. In a subsequent interpretative letter, for example, the OCC emphasized that all banking activities, including activities related to crypto-assets, must be conducted in a safe and sound manner, and directed banks to request a ” prudential non-objection before committing. in all activities related to crypto-assets. During 2022, the Federal Reserve and FDIC followed suit, issuing guidance documents that also directed banks to seek notice before engaging in these activities and noting that regulators would provide ” relevant supervisory feedback”.

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

The statement goes beyond past guidance by expressing current agency views on security and robustness:

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 over an open, public, and / or decentralized, or a similar system is very likely incompatible with safe and sound banking practices.

This conclusion could be interpreted as applying to certain activities previously identified as legally authorized by the OCC as well as other crypto activities on which the OCC (or other banking agencies) have not yet issued of public opinion. The agencies also say they have “significant security and soundness issues with business models that are concentrated in crypto-asset-related businesses or have concentrated exposures to the crypto-asset industry.” Notwithstanding the disclaimer that banks are neither prohibited nor discouraged from providing banking services to customers of a specific category or type, the statement raises doubts as to whether there is a way viable for banks to engage in business related to crypto assets or serve crypto. other than limited related undertakings.

These general statements of safety and soundness set the bar high for banks looking to engage in these activities. They raise, rather than answer, a number of questions: (1) What does “security and soundness” mean in the context of crypto activities, including traditional banking activities such as safekeeping, payments and deposits ? (2) Who is responsible for defining it, the bank, its regulators or both? (3) Are banks currently engaged in crypto activities acting in dangerous or unhealthy ways? (4) What about banks providing traditional banking services to crypto businesses? Given the confidential nature of the oversight process and the lack of detail and clarity in the joint statement, the public can only guess, and banks will likely be discouraged from pursuing crypto business.

Two Key Takeaways The Federal Reserve, FDIC, and OCC have said that issuing or holding cryptoassets is “highly likely to be inconsistent with safe and sound banking practices,” and they have “d ‘significant security and soundness issues with business models that are concentrated in crypto-asset-related businesses or have concentrated exposures to the crypto-asset industry.’ Banks should be cautious about whether and how they conduct crypto business or serve crypto businesses, and prepare for criticism from supervisory authorities.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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