The Federal Reserve has announced a new program dubbed ‘Novel Activities Supervision Program’ as part of its effort to supervise the activities going on between the crypto industry and the traditional banking system, especially those supervised by the Fed.
Therefore, any Fed-supervised bank interested in engaging in crypto activities including stablecoin settlements, will be required to follow the rules of the newly introduced program.
Federal Reserve Fears Innovation Will Trigger Novel Risks
As announced on Tuesday, “the central bank will enhance the supervision of all banking organizations it oversees, focusing on crypto, distributed ledger technology, as well as “technology-driven partnerships with nonbanks to deliver financial services to customers.”
Notably, the Federal Reserve is perturbed that innovations could trigger rapid changes in individual banks or even in the financial ecosystem and this may in turn generate novel manifestations of risk that would hamper the safety of banking organizations in the United States.
Considering the novelty of these risks, they may not be addressed in existing regulatory frameworks and thereby, end up becoming a much bigger challenge for the broad financial system.
No Restrictions on Specific Asset Class
To address this issue, a separate supervisory framework would not be created, rather the program will work within the existing supervisory portfolios and alongside existing supervisory teams. Lenders whose activities would be subject to evaluation will be notified in writing by the Fed.
Noteworthy, the central bank clarified that it had no plans of limiting or discouraging banking organizations from providing their services to customers of any specific asset class or type. Instead, it is trying to “allow for innovations that improve access to and the delivery of financial services, while also safeguarding bank customers, banking organizations, and financial stability.”
Fed-Supervised Banks Placed on Fair Playing Field
The newly introduced supervisory program is an additional measure to the Board’s statement which was released on January 27th to promote a level playing field for all banks with a federal supervisor, regardless of deposit insurance status. Precisely, the policy is aimed at ensuring that all Fed-supervised banks are subject to the same crypto-related limitations.
In addition, the Fed rejected Custodia Bank’s application to become a member of the Reserve system of the U.S. Fed Reserve Board. The Fed tied its decision on the application to the inability of the firm to submit a regulated and consistent application in line with the required factors.