Fed policy to align bank oversight could limit crypto activities by state banks

The new policy would align the allowable activities for insured and uninsured state banks and OCC-supervised national banks by making rules for state banks more restrictive.

The United States Federal Reserve Board announced Jan. 27 that it was issuing a policy statement on limitations on banks. The policy seeks to create a level playing field and limit regulatory arbitrage for state banks with deposit insurance, state banks without deposit insurance and national banks, which are overseen by the Office of the Comptroller of the Currency (OCC), by allowing them the same scope of permissible activities.

The new policy will limit the activities of state banks by not allowing them to engage in activities not permitted by national banks unless state legislation allows it. In the Federal Register notice, the statement specifically discusses crypto at length. It stated:

“The Board has not identified any authority permitting national banks to hold most crypto-assets […] As principal in any amount, and there is no federal statute or rule expressly permitting state banks to hold crypto-assets as principal. Therefore, the Board would presumptively prohibit state member banks from engaging in such activity under section 9(13) of the [Federal Reserve] Act.”

The notice also said that state banks have proposed issuing “dollar tokens” — that is, stablecoins — and those banks now will be subject to OCC interpretative letters 1174 and 1179, as are national banks. It added:

“The Board generally believes that issuing tokens on open, public, and/or decentralized networks, or similar systems is highly likely to be inconsistent with safe and sound banking practices.”

The statement was issued on the same day that the Fed rejected the application of Wyoming’s Custodia Bank for Federal Reserve System membership.

Related: OCC makes its staff available for fintech-related discussions

The Fed beefed up scrutiny on banks engaging in crypto activities in August 2022, when it issued a letter requiring the banks it oversees to disclose plans that include crypto, with a reminder to ensure adequate risk management. The letter applied retrospectively to banks already active in crypto.

@federalreserve issues policy statement to promote a level playing field for all banks with a federal supervisor, regardless of deposit insurance status: https://t.co/ms40zhoYUY

— Federal Reserve (@federalreserve) January 27, 2023