On January 3, 2023, the US federal banking regulators released a
statement highlighting key risks for banking organizations
associated with crypto-assets and the crypto-asset sector and
describing their approaches to supervision in this
area.1 While the statement is consistent with the
concerned tone of earlier guidance, it provides more detail
regarding supervision of these activities.
In this Legal Update, we provide background on the federal
banking regulators’ approach to supervising crypto-asset
activities and discuss their most recent statement.
Background
Since November 2021, federal banking regulators have been
increasingly wary of the crypto-asset activities of banking
organizations. Their initial views were that it was important to
coordinate development of a uniform policy on the scope and
prudential requirements for banking organizations’
crypto-related activities.2They determined that there
were a number of issues surrounding banking organizations’
participation in crypto-related activities that warranted further
supervisory guidance. They planned to release regulatory materials
throughout 2022 that would provide (i) greater clarity on whether
certain activities related to crypto-assets conducted by banking
organizations are legally permissible and (ii) expectations for
safety and soundness, consumer protection and compliance with
existing laws.
Their coordination took the form of supervisory directives that
banking organizations provide their primary federal regulator with
prior notice of most crypto-asset activities.3 In
practice, these prior notice requirements function as prior
approval requirements.
More recently, the Office of the Comptroller of the Currency and
Board of Governors of the Federal Reserve System have approved
applications from banking organizations that imply certain
crypto-asset activities are not permissible for banking
organizations.4
However, formal agency guidance on whether certain activities
related to crypto-assets conducted by banking organizations are
legally permissible has not been issued.
January 2023 Statement
The most recent statement attempts to take a balanced approach.
It lists eight “key risks” associated with crypto-assets
and crypto-asset sector participants . However, it also states that
banking organizations are neither prohibited nor discouraged from
providing banking services to customers of any specific class or
type, as permitted by law or regulation. Further, it notes that the
agencies continue to build knowledge, expertise, and understanding
of crypto-asset risks.
Embedded in this current approach are two noteworthy statements
for banking organizations and the crypto sector.
First, the regulators state that they believe that “issuing
or holding as principal crypto-assets that are issued, stored, or
transferred on an open, public, and/or decentralized network, or
similar system” is highly likely to be inconsistent with safe
and sound banking practices. While not phrased as a final
determination, it sets a seemingly high bar for a banking
organization to demonstrate that it has adequately assessed the
risks of a proposed activity and sufficiently mitigated these once
an activity is determined to fall within this definition.
Second, the regulators state that the agencies have significant
safety and soundness concerns with business models that are
concentrated in crypto-asset-related activities or have
concentrated exposures to the crypto-asset sector. This concern may
be aimed at certain banking organizations with large concentrations
in the crypto-asset sector. This is similar to what we have seen in
the past with regulator concerns regarding concentrations of money
services businesses and certain types of credit exposures.
However, neither statement – nor the broader joint
statement itself – distinguishes among the various types of
crypto-asset activities in which an organization may engage or the
corresponding (and differing) levels of risk that may be associated
with those activities.
Takeaway
The risks identified in the most recent statement from the
federal banking regulators have been well-publicized in the market
and are not particularly novel.
However, the identification of certain crypto-asset activities
as possibly being inconsistent with safe and sound banking
practices may dissuade many banking organizations from considering
or pursuing those activities. Banking organizations that are
currently considering, planning or developing their crypto-asset
strategies should anticipate regulatory scrutiny with risk
mitigation structures.
Similarly, the crypto-asset sector has long struggled to obtain
traditional banking services from beyond a relatively small number
of banking organizations. Therefore, these concerns could result in
crypto-asset activities and customers remaining outside the bank
regulatory perimeter.
Footnotes
1. Press Release, Agencies issue joint statement on
crypto-asset risks to banking organizations (Jan. 3, 2023), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230103a.htm.
2. See our Legal Update on the initial roadmap: https://www.mayerbrown.com/en/perspectives-events/publications/2021/11/us-banking-regulators-release-roadmap-for-cryptorelated-activities-by-banks.
3. See our Legal Update on these prior notice
requirements: https://www.mayerbrown.com/en/perspectives-events/publications/2022/08/crypto-guidance-released-by-us-federal-reserve.
4. See, e.g., OCC, Cond. App. No. 1299
(October 27, 2022).
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