Author: Bitkoala Finance
The Federal Reserve has sent a letter to regulatory officials and relevant supervisors and examiners of the Federal Reserve Banks and all state-owned banks in the United States, announcing a new plan to oversee banks' cryptocurrency activities and further clarifying that lenders under its jurisdiction must obtain approval before engaging in digital assets and so-called "Dollar Token" activities.
Background of the Federal Reserve’s launch of the “New Activities Supervision Program”
The Board of Governors of the Federal Reserve System issued a policy statement in January regarding Section 9(13) of the Federal Reserve Act, which restricts state member banks and their subsidiaries from engaging in activities as principals only those permitted for national banks and requires banks to comply with the terms, conditions, and restrictions of the Federal Reserve Bank and its subsidiaries.
The Office of the Comptroller of the Currency (OCC) specifically recognizes that domestic banks in the United States have the right to use distributed ledger technology or similar technologies as principals to conduct payment activities, including issuing, holding or trading "dollar tokens." However, the OCC limits the legal permissibility of these activities to banks must prove that they have appropriate controls to conduct these activities in a safe and sound manner to the satisfaction of their regulators.
Simply put, if a bank regulated by the Federal Reserve needs to participate in stablecoin transactions, it first needs to prove to regulators in advance that it can do so in a "safe and reliable manner", and then it needs to obtain formal approval from the Federal Reserve. This is easier said than done. After all, it is not easy to prove that it can "identify, measure, monitor and control the risks of its activities", not to mention security vulnerabilities involving customer runs and hackers.
So how will the Fed review banks that wish to process cryptocurrency activities? Let’s continue:
5 “Dollar Token” Risks That the Fed Is Most Concerned About
In fact, the Federal Reserve has provided a so-called “non-objection process for US dollar token activities”, from which we may be able to get a glimpse of the clues:
First, the Federal Reserve requires that banks under its jurisdiction that engage in cryptocurrency activities (including Federal Reserve state member banks that issue, hold or trade "dollar tokens" to facilitate payments) must have taken appropriate control measures to conduct activities in a safe and sound manner. In order to verify whether this requirement is met, Federal Reserve state member banks should receive a written notice of regulatory no objection from the Federal Reserve before engaging in proposed activities.
Second, the Federal Reserve state member banks seeking to engage in such "dollar token" activities (including for testing purposes) must also notify their primary supervisory contact at the Federal Reserve of the bank's intention to engage in the proposed activities, and should include a description of the proposed activities. Federal Reserve supervisors may follow up with the bank to seek additional information to better understand the proposal and the control framework that has been implemented. After receiving written notification of supervisory non-objection, the Federal Reserve state member banks will also continue to be subject to supervisory review and enhanced monitoring of these activities.
In order to obtain a written notice of supervisory non-objection, a national member bank should demonstrate that it has established appropriate risk management practices for the proposed activities, including having appropriate systems to identify, measure, monitor, and control the risks of its activities, and the ability to do so on an ongoing basis. The Federal Reserve staff will also assess whether the bank has demonstrated that it understands and will comply with the laws applicable to the proposed activities and will focus on the risks discussed in the preamble to the policy statement regarding "dollar tokens", including but not limited to:
1. Operational risks: including risks related to network governance and oversight; clarity of roles, responsibilities and obligations of the parties involved; and transaction verification processes (e.g., the timing and finality of transaction settlement, the potential irreversibility of transactions, and the central authority of transaction records).
2. Cybersecurity risks: including risks associated with the USD Token trading network, the use of smart contracts, and the use of any open source code;
3. Liquidity risk: including the risk that a large number of “USD Tokens” may be redeemed in a short period of time, causing a rapid outflow of deposits;
4. Illicit financial risks: including risks associated with compliance with the Bank Secrecy Act and Office of Foreign Assets Control requirements, which include requiring banking institutions to verify customer identities, conduct due diligence to understand the nature and purpose of customer relationships, and perform ongoing monitoring to identify and report suspicious activity;
5. Consumer compliance risks: including risks associated with identifying and ensuring compliance with any consumer protection statutes and regulations applicable to specific “USD Token” activities.
Summarize
The Fed's policies (such as interest rate hikes or cuts) have always had a significant impact on the cryptocurrency market. The "New Activities Regulatory Plan" launched this time will make it more difficult for traditional financial institutions such as banks to participate in cryptocurrency transactions, and they will also face stricter scrutiny. In the short term, these measures may cause market fluctuations, but in the long run they will have positive significance for the healthy development of the entire industry.
