By: Eric S. Kracov (Kilpatrick Townsend)
The Federal Reserve Board (the “FRB”) has signaled a new approach to the oversight of “novel” activities by banks subject to FRB supervision. In a recent letter to supervisory staff, the FRB indicated that it would introduce enhanced supervision under a risk-based approach for banks that seek to take advantage of “financial innovations supported by new technologies.” While the new program targets several crypto- and blockchain-related activities, the program will also impact fintech-bank partnerships which, for many banks, have become an essential tool for banking-as-a-service initiatives.
The letter follows the release of a FRB policy statement in February 2023 that signaled the agency’s intention to follow the Comptroller of the Currency’s (the “OCC”) guidelines for national banks to determine the range of permissible “novel” activities for state member banks. The FRB also indicated that activities generally permitted by the Federal Deposit Insurance Corporation for insured institutions would also be permissible for state member banks.
The new supervision program will focus on four specific areas of bank activity:
- concentrated provision of traditional banking services to crypto-asset related entities and fintechs, including deposit, payment, and lending to crypto-asset firms and fintechs;
- projects that use distributed ledger technology with the potential for significant impact on the financial system.
- crypto-asset related activities including lending collateralized by crypto assets, facilitation of crypto-asset trading and the issuance or distribution of stablecoin/dollar tokens; and
- complex technology-driven partnerships with nonbanks to provide banking services to end customers, including services based on the use of application programming interfaces (“APIs”) that provide automated access to bank infrastructure.
The novel activities program will operate within the framework of existing FRB supervisory teams. The letter notes that banks engaging in novel activities will be notified in writing that a review of such activities will be subject to examination. The review will be risk-based, and the level of scrutiny will vary based on the level of the bank’s engagement in novel activities. The FRB will also “routinely” monitor banks that are exploring novel activities…