FRB Issues Policy Statement Limiting State Member Banks' Activities
Commentary by Steven Lofchie
In a policy statement, the Federal Reserve Board ("FRB") said that it will exercise its discretion under Federal Reserve Act Section 9(13) (12 U.S.C. 330) to limit state member banks to engaging as principal in only those activities that are permissible for national banks. The FRB emphasized that both insured and uninsured state member banks ("SMBs") acting as a principal are generally subject to the same activity limitations as national banks, including with respect to novel banking activities such as crypto asset-related activities.
In the policy statement, the FRB said that it will rebuttably presume that an SMB is prohibited from engaging in such activity as principal if it is impermissible for national banks to engage in such activity. There is an exception for activities that are permissible for state banks under federal statute or Part 362 of the FDIC's regulations ("Activities of Insured State Banks and Insured Savings Associations"). The presumption of impermissibility may be rebutted if there is "a clear and compelling rational for the [FRB] to allow the proposed deviation in regulatory treatment among federally supervised banks, and the [SMB] has robust plans for managing the risks of the proposed activity in accordance with principles of safe and sound banking." The FRB emphasized that legal permissibility is a "necessary, but not sufficient, condition to establish that [an SMB] may engage in a particular activity."
The policy statement also addressed SMBs' potential engagement in crypto-related activities. The FRB clarified that it does not prohibit an SMB from providing "safekeeping services for crypto-assets in a custodial capacity if such activities are conducted in a safe and sound manner and in compliance with consumer, anti-money laundering, and anti-terrorist-financing laws." However, the FRB emphasized that it would presumptively prohibit SMBs from holding most crypto assets as principal in any amount, as the FRB has not identified any authority permitting national banks to hold most crypto assets.
The FRB indicated that an SMB might be permitted to issue dollar-denominated tokens if it were able to demonstrate (i) compliance with OCC Interpretive Letter 1174 and Interpretive Letter 1179, and (ii) that it "has controls in place to conduct the activity in a safe and sound manner, and [has received] a supervisory nonobjection before commencing such activity."
Commentary
The FRB should address custodial services in digital assets. Allowing regulated banks to provide such services to retail investors would potentially reduce a significant risk to which such investors are now subject, as the collapse of FTX demonstrates.