A new Federal Reserve supervisory letter on the process for state member banks using dollar tokens, such as stablecoins, to facilitate payments has drawn the ire Monday (Aug. 28) of members of Congress.
Earlier this month, the Fed released guidelines for state member banks to first get a written supervisory nonobjection from the Federal Reserve before issuing, holding, or transacting in dollar tokens, according to an agency press release.
The requirement is aimed at ensuring that banks have appropriate risk management practices in place, including systems to identify and monitor potential risks such as cybersecurity threats and illicit finance risks. State member banks engaging in dollar token-related activities will also be subject to ongoing supervisory review and heightened monitoring.
The agency also created a Novel Activities Supervision Program to supervise “novel activities” conducted by banking organizations, including crypto-assets, distributed ledger technology (DLT) and technology-driven partnerships with nonbanks to deliver financial services. It aims to complement existing supervisory processes and strengthen the oversight of tech-driven activities.
“The goal of the novel activities supervision program is to foster the benefits of financial innovation while recognizing and appropriately addressing risks to ensure the safety and soundness of the banking system,” the agency said in a released statement. “The program will be integrated into the Federal Reserve’s existing supervisory processes, with program experts working alongside current supervisory teams to oversee banks engaged in novel activities.”
However, lawmakers on Monday criticized both actions, charging the Fed was undermining congressional efforts to put together stablecoin regulations.
In a letter sent to Federal Reserve Chairman Jerome Powell, U.S. Reps. Patrick McHenry, R-N.C., French Hill, R-Ark., and Bill Huizenga, R-Mich., criticized the Fed’s move. McHenry is the chairman of the House Financial Services Committee, Hill is the vice chair and Huizenga is the chair of the Oversight and Investigations Subcommittee.
“We are concerned that these actions are being taken to subvert progress made by Congress to establish a payment stablecoin regulatory regime,” the letter said. “Moreover, if these letters are left in place, they will undoubtedly deter financial institutions from participating in the digital asset ecosystem. Congress understands the need to provide regulatory certainty for payment stablecoins and the broader digital asset ecosystem. A regulatory framework established by Congress will better protect consumers and provide certainty to market participants.”
In a statement emailed to PYMNTS, a Fed spokesperson said, “We have received the letter and plan to respond.”
The Fed’s letters come in response to the increasing interest and involvement of banks in stablecoins and other cryptocurrency-related activities and after high-profile collapses in both the banking and crypto sectors over the past year.
In related news, the launch of a stablecoin by PayPal has raised concerns among lawmakers. U.S. Rep. Maxine Waters, the top Democrat on the House Financial Services Committee, expressed deep concerns about PayPal’s decision to launch a stablecoin. Waters emphasized the need for federal oversight and enforcement to guarantee consumer protections and alleviate financial stability concerns.
The differing views on stablecoins within the House Financial Services Committee reflect the ongoing debate surrounding the regulation of cryptocurrencies and the need for comprehensive digital asset regulation. While some lawmakers see stablecoins as a promising pillar of the modern payments system, others emphasize the importance of clear regulations and robust consumer protections. The development of stablecoin regulation is crucial to strike a balance between fostering innovation and ensuring financial stability.