The Federal Reserve’s Division of Supervision and Regulation (SR-27) has established a Novel Activities Supervision Program (Program) to enhance the supervision of novel activities conducted by banking organizations[1]. The Program will focus on activities related to crypto-assets, distributed ledger technology (DLT), and complex, technology-driven partnerships with nonbanks. The Program is risk-focused and will complement existing supervisory processes. The Program is applicable to all banking organizations supervised by the Federal Reserve, including those with $10 billion or less in consolidated assets. The background and rationale for the Program, note that financial innovation can benefit the U.S. economy and consumers but can also generate novel risks. The Program will work in partnership with existing Federal Reserve supervisory teams. It will be risk-based, with the level and intensity of supervision varying based on each supervised banking organization’s level of engagement in novel activities. The Federal Reserve will notify in writing those supervised banking organizations whose novel activities will be subject to examination through the Program. The Program will be advised by multidisciplinary leaders around the Federal Reserve System and will engage with external experts from academia and the banking, finance, and technology industries. The Program will incorporate insights and analysis from real-time data, market monitoring, horizontal exams, and information exchange. The Program will help ensure that regulation and supervision allow for innovations while safeguarding bank customers, banking organizations, and financial stability.
Additionally, the Federal Reserve emphasized its intent to close any regulatory loopholes which allow regional or state-chartered banks that are perceived to be “crypto-friendly” to operate with little to no scrutiny. In particular, the Federal Reserve required such state-chartered banks to demonstrate appropriate safeguards to mitigate financial and technological risks posed by digital assets.
The heightened scrutiny of digital assets and associated FinTech highlights the need for financial institutions to implement appropriate AML, liquidity management, and cyber-security protocols. And those protocols must be reviewed and updated regularly.
TALG has extensive experience navigating the complex Financial Institution compliance regulations and statutes concerning digital assets.
[1] Federal Reserve System Washington, D.C. 20551; SR 23-7 (August 8, 2023)
