Federal Reserve Puts Bankers on Notice: “If You Are Engaging in Crypto We Need to Talk”
Attention crypto community, the Federal Reserve issued a Supervision and Regulation (S&R) Letter on August 16th that will directly impact the relationship between banks and crypto projects. Let’s dive into what is an S&R Letter, what the recent crypto related letter says, why it’s important and what it could portent for crypto projects.
We need to start with, what is a Supervision and Regulation Letter? Essentially, an S&R Letter is a document signed by the Director of Banking Supervision that directs how Federal Reserve Bank Examiners conduct banking supervisory activities. Indirectly S&R Letters control permissible banking activities by directing what examiners must do when conducting audits. The S&R Letter at issue is SR-22–6, titled, “Engagement in Crypto Asset Related Activities by Federal Reserved Supervised Banking Organizations”.
Let’s turn our attention to the letter beginning with applicability. Essentially, the Director did not exclude any bank from the standards, regardless of size. Ordinarily, the Federal Reserve’s examination standards depend on the size and nature of the financial institution. Why the departure from the norm? SR Letter 22–6 states: “This letter applies to all banking organizations supervised by the Federal Reserve, including those with $10 billion or less in consolidated assets.” Apparently, when it comes to crypto, one-size fits all.
SR Letter 22–6 starts with half a sentence regarding the potential of crypto as an innovation then proceeds to lay-out four areas of concern:
- Technology and operation.
- Anti-money laundering and countering of financing of terrorism.
- Consumer protection and legal compliance.
- Financial stability.
Based on their areas of concern SR Letter 22–6 details what is expected from member banks and bank examiners. Let’s take one concern at a time.
First, the Federal Reserve expects banks to notify lead supervisory points of contact prior to engaging in any crypto-asset-related activity. In other words, tell us if you are thinking of engaging in crypto asset related activity.
Second, banks need to determine whether any filings are required under federal or state laws. In other words, after you told us you are thinking about it then ask for permission in writing.
Third, the Federal Reserved says banks must implement risk management and controls. The Letter identifies a number of risk management and controls, including: operational risk (e.g. risks of new, evolving technologies); the risk of hacking, fraud, and theft; the risk of third-party relationships; financial risk; legal risk; compliance risk (including, but not limited to, compliance with the Bank Secrecy Act, anti-money laundering requirements, and sanctions requirements), and any other risk necessary to ensure the activities are conducted in a manner that is consistent with safe banking practices.
A footnote worth noting. In footnote three, the Federal Reserve Bank referred to crypto as an asset. Does this signify bank regulators prefer the Securities and Exchange Commission (SEC) regulate crypto over the Commodities Future Trading Commission? Perhaps? We know the “Federal Government” has not decided whether crypto is a security, a commodity, a property. We also know there is bureaucratic battle in Washington over which agency will regulate crypto. More on that theme in a future article.
What can we conclude? The upshot is Federal Reserve S&R 22–6 does not prevent banks from engaging in crypto-related assets. But, but, but, when it comes to crypto, it’s abundantly clear banks better be prepared to notify, justify, and explain what they are doing.
At Clanity we comply with applicable regulations and value our customers. By the end of 2022, we will be launching our token sale ($Clan) through our partnership with DripDropz, MLabs and Indacoin. Feel free to join the Whitelist token sale notification list by visiting our website.
Written by: Mr. Nelson Hernandez
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