HFS Leaders Say FRB Guidance Will Deter Digital Asset Engagement

House Financial Services Committee Chair Patrick McHenry (R-NC) and Subcommittee Chairs French Hill (R-AR) and Bill Huizenga (R-MI) expressed concern that the Federal Reserve Board's ("FRB") August 8, 2023 supervisory guidance will deter financial institutions from activities using digital assets.

In a Letter to FRB Chair Jerome Powell, the legislators criticized FRB Division of Supervision and Regulation guidance which addressed (i) "novel activities" and (ii) the process for state member banks to follow before engaging with "dollar token" (i.e., payment stablecoin) activity (see previous coverage). The legislators argued that the FRB was acting to "subvert progress made by Congress to establish a payment stablecoin regulatory regime" by issuing the guidance approximately two weeks after the House Financial Services Committed favorably reported out the Clarity for Payment Stablecoins Act. The legislators also said that the FRB guidance would "ultimately lead to a de facto prohibition on banks engaging with the digital asset ecosystem" by (i) creating regulatory burdens for banking entities interested in digital assets and (ii) providing the FRB with "additional tools" to deny crypto asset-related activity.

The legislators asked that by September 29, 2023 the FRB provide the following information on supervisory guidance contained in SR 23-7 regarding:

• the FRB's plan for ensuring a "fair and consistent" process for determining which banking organizations will be subject to supervisory examination of novel activities;
• how the FRB defines "banking products and services to end customers" in relation to products and services offered through third parties of banking organizations;
• how the FRB will determine which stakeholders to consult as part of its plan to "engage broadly with experts from academia and the banking, finance, and technology industries"; and
• whether the FRB will reconsider previously denied applications for depository institutions who indicated that they engaged in the novel activities covered under the guidance.

The legislators also asked for the following information on supervisory guidance contained in SR 23-8 regarding:

• whether the FRB will consult state banking regulators as part of its nonobjection process;
• whether the FRB will elaborate on its process for evaluating financial institutions in connection with conducting payment stablecoin activities;
• the FRB's process for examining a state member bank’s proposal for testing payment stablecoin activities, and the conditions under which the FRB would deny giving a written notification of supervisory nonobjection to a state bank in response to a proposal; and
• the timing of when the FRB first began drafting the guidance.