In response to growing demand for more guidance over digital assets and fraud concerns, the Federal Reserve Board intends to prohibit a large portion of cryptocurrency from regular banking activity.
The board’s final rule, published on Feb 7, outlines two directives. The first directive explains how the board will “presumptively prohibit” member banks from holding most crypto assets. Under the Federal Reserve Act, the board is responsible for dictating the banking activities that state depository institutions can legally conduct – only that which is also permissible for national banks.
“[For] any novel and unprecedented activities, such as those associated with crypto-assets or use of distributed ledger technology, it’s important for a state member bank to have in place appropriate systems to monitor and control risks,” the rule states.
The rule also notes that most digital assets “inherently prevent banks from ensuring such security.” But despite concurring that employing digital assets in the U.S. banking system poses security threats, the board offered some avenues for potential incorporation.
For example, certain state member banks have proposed issuing dollar-denominated tokens – or dollar tokens – using distributed ledger technology or similar technologies.
The second directive states that member banks wishing to utilize dollar tokens must prove security measures and receive formal approval before their use in banking transactions. Member banks are eligible to receive a supervisory nonobjection from the board “if they can demonstrate the ability to conduct safe banking with cryptocurrency,” according to the final rule.
However, the board said it generally believes that issuing dollar tokens on “open, public, and decentralized networks or similar systems is highly likely inconsistent with safe and sound banking practices,” the rule continues.
The value of most crypto assets is driven by sentiment and future expectations, not by cash flows from providing goods or services outside the crypto-asset ecosystem. Because of that, firms that hold crypto-assets do not engage in “prudent risk management,” the board said.
“The crypto asset sector – globally dispersed – is largely unregulated or noncompliant with regulation, and issuers are often not subject to or not compliant with disclosure and accounting requirements, which makes it difficult or impossible to assess market and counterparty exposure risks,” the final rule states.
The final rule, according to the Federal Reserve, is bolstered by these safety and soundness concerns regarding digital assets.