August 16, 2022

FRB Issues Supervisory Letter on Risks to Banks Engaging in Crypto-related Activities

Steven Lofchie Commentary by Steven Lofchie

The Federal Reserve Board ("FRB") outlined steps supervised banks should take to ensure their cryptocurrency-related activities are conducted in a safe and sound manner.

In a Supervision and Regulation Letter, the FRB urged all Federal Reserve Banks and FRB-supervised banking organizations seeking to engage in cryptocurrency-related activities to do the following prior to engaging in such activities: (i) determine the legal permissibility of such activities as to relevant federal and state laws; (ii) file any required documents necessary to engage in the planned activities; (iii) ensure adequate "systems, risk management, and controls to conduct crypto-asset-related activities in a safe and sound manner and consistent with applicable laws" are in place (including adequate systems to identify, monitor and control the risks associated with such crypto-asset-related activities on an ongoing basis); and (iv) notify their lead supervisory contact at the Federal Reserve prior to engaging in such new activities. The FRB also urged any banking organization currently engaged in cryptocurrency-related activities to notify the Federal Reserve as soon as possible.

The FRB also emphasized several prominent risks of crypto-assets to consider prior to engaging in crypto-related activities, including:

  • cybersecurity and governance risks posed by novel crypto technologies, especially technologies that utilize open, permissionless networks;
  • AML/CFT risks given that use of crypto-assets provides an additional layer of anonymity compared to traditional finance that makes transactions harder to track;
  • high price volatility, misinformation, fraud and other illicit activities, all of which pose risks to consumer protections;
  • potential legal exposure arising from compliance risks induced by (i) uncertain regulation, (ii) consumer losses and (iii) operational failures; and
  • financial stability risks if adopted on a large scale, such as disruptions to payment systems and the potential for destabilization.

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