Fed Warns Banks to Check Legality of Crypto-Related Activity

The Federal Reserve is directing banks under its supervision to check in with the regulator before engaging in crypto-related activities to be sure those activities are legal. 

The guidance is similar to statements from the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, which instruct banks to consult with the regulator before offering custody services or engaging in crypto-related activities. 

Banks and their entry into crypto-related activities is a topic that has been picking up more attention from lawmakers. Sen. Pat Toomey, R-Pa., sent a letter to the FDIC earlier Tuesday questioning the agency's communications with banks on the subject, and a group of progressive lawmakers led by Sen. Elizabeth Warren, D-Mass., pushing the OCC to rescind Trump-era guidance about banks' involvement in the space.

The move reflects a growing interest by banks to start mingling in the crypto space, and the reluctance of regulators in the Biden administration to let them. In feedback to the Treasury Department in its request for information, banking groups wrote that they'd like a larger role in the crypto market, while regulators have signaled a more cautious approach. 

The guidance applies to all banking organizations supervised by the Fed, including those with $10 billion or less in consolidated assets.

One day prior to the Fed's letter, the central bank issued its final guidance on novel financial companies accessing master accounts, which allow institutions to transfer money directly to other account holders in a network that underpins the global financial system.

The new guidance could clarify for special-purpose depository institutions such as Wyoming-chartered crypto firms Custodia and Kraken, how to access the payment rails without needing intermediary banks. 

NOTE: Federally insured credit unions can partner with third parties to provide digital asset services, according to December 2021 letter from National Credit Union Administration (NCUA) Chairman Todd Harper. The letter offered long-awaited assurance for credit unions looking to allow their members to buy, sell and hold digital assets. The NCUA has said it will treat such partnerships the same as all other third-party relationships.