Fed Board Issues Directives Restricting Member Banks Holding Crypto as Principal

The US Federal Reserve rule cemented the Central bank’s caution about crypto asset activities, prohibiting member banks from holding assets as principal.

According to the statement from the Federal Reserve System, the board of governors, the new directives clarify Section 9 (13) of the Federal Reserve Act in reply to the queries from state member banks about involvement in crypto asset activities.

Two directives issued by the board state that it will “presumptively prohibit” member banks from holding crypto assets as principal, including bitcoin and ether, and the banks that issue dollar tokens will have to demonstrate the application of safety controls.

It elaborated that the crypto asset industry is “largely unregulated or non-compliant” with regulations from a market conduct perspective, and issuing tokens on decentralised networks raises cybersecurity concerns. 

“In practice, this presumption could be rebutted if there is a clear and compelling rationale for the Board to allow deviations in regulatory treatment among federally supervised banks, and the state member bank has robust plans for managing the risks of such activities in accordance with principles of safe and sound banking,” the board said.

Still, the member banks can supply safekeeping services for crypto assets in a custodial manner if they are conducted safely.

There are 12 regional banks of the Fed Reserve across the US, which each oversee member banks in their own state. These are state banks that have joined hands with the Fed Reserve System. For instance, the Federal Reserve bank of Dallas oversees several entities, including the American State Bank, Texas National, Comerica, and Big Bend Banks. 

The risks arising that the US is clamping down on the digital asset sector, with several FIs like the Federal Deposit Insurance Corporation and the Office of Comptroller of the Currency highlighting significant concerns linked with the industry. 

In another such occurrence, a crypto-focused bank, Custodia’s member application for the Fed Reserve was recently put down due to its “novel business model and proposed focus on cryptoassets.” 

Individually, the White House issued a blog called “The Administration’s Roadmap to Mitigate Cryptocurrencies’ Risks,” anointing Congress to step up actions to pass crypto asset legislation.

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