On Tuesday, the Federal Reserve announced a new framework to increase the supervision of the US banking sector. The central bank called for stricter monitoring of the banks particularly involved in crypto and stablecoin activity.
Under the initiative named “Novel Activities Supervision Program,” the Federal Reserve intends to enhance the supervision of all the banking agencies under its control. The framework focuses on crypto, distributed ledger technology, as well as “technology-driven partnerships with nonbanks to deliver financial services to customers.”
While acknowledging the innovation that the novel technologies have to offer, the central bank also highlights the risks involved putting the larger financial system to threat. The statement read:
Innovation can also lead to rapid change in individual banks or in the financial system and generate novel manifestations of risks that can materially impact the safety and soundness of banking organizations.
Expressing the speculations arising from the increasing interest into the novel technologies, the bank states that such acts raise questions around their “permissibility, may not be sufficiently addressed by existing supervisory approaches, and may raise concerns for the broader financial system.” To this, the Federal Reserve says that agencies participating in such “novel” activities would not be moved to a separate supervisory portfolio.
It adds that the newly launched program will work within the existing supervisory portfolios and with the existing teams. Notably, it would be notifying in writing the banks whose activities will be subject to evaluation. Hence, the program will prove efficient in enhancing regulation and supervision. The statement read:
The Program will help ensure that regulation and supervision allow for innovations that improve access to and the delivery of financial services, while also safeguarding bank customers, banking organizations, and financial stability.
Furthermore, the central bank added that banking organizations would not be prohibited or discouraged from providing banking services to customers of any specific class or type. Additionally, the Federal Reserve also published more information for supervised state banks looking to engage in stablecoin activity.
The central bank said those banks should have risk management practices in place for cybersecurity, liquidity, consumer compliance and illicit finance risks. Notably, the Fed’s recent announcement comes weeks after the House Financial Services Committee advanced a comprehensive regulatory framework for stablecoins, though bipartisan negotiations later hit a snag.
It is also important to note that the Fed is trying to send a strong message to the banks with crypto exposure through their new program. Notably, traces of the threats and risks highlighted in the announcement hail from the SVB and Signature banking collapse earlier this year which sent shock waves through crypto industry.
As reported by Todayq News, the Signature bank suggested one of the top three banks was closed down by the Feds on the pretext of “systemic risk” in order to stop the losses and prevent a huge catastrophe. The bank had also called out the central bank for its anti-crypto behavior.
Prior to that, in January, the Fed Board indicated that it would issue a policy statement about bank restrictions. By giving all state banks, including those regulated by the Office of the Comptroller of the Currency (OCC) and those without deposit insurance, the same range of permitted activities, the policy aims to level the playing field and reduce regulatory arbitrage.
Additionally, in June, Federal Reserve Chair Jerome Powell expressed his support for considering payment stablecoins as a form of money, highlighting the importance of robust federal regulation. Powell’s stance emerged amidst discussions surrounding a proposed stablecoin bill introduced by Representative Maxine Waters, which has received mixed reactions and sparked debates within the crypto community.