In Short
The Situation: Since clarifying the legal permissibility of certain crypto activities in 2020 and early 2021, the Federal banking agencies have begun to tighten regulatory scrutiny of such activities, warning banks regarding applicable risks, imposing procedural checks on their commencement, and emphasizing the importance of engaging in those activities in a safe and sound manner.
The Result: On January 3, 2023, the Federal Reserve, Federal Deposit Insurance Corporation ("FDIC"), and Office of the Comptroller of the Currency ("OCC") issued a joint statement expressing their skepticism that certain crypto-asset-related activities can be conducted in a safe and sound manner at the current time. They further noted the importance of preventing risks related to the crypto-asset sector from migrating to the banking system.
Looking Ahead: Although the crypto-asset-related activities addressed by earlier OCC interpretive letters may still be legally permissible for banks, the agencies' view that certain of these activities are "highly likely to be inconsistent with safe and sound banking practices" nonetheless narrows the path forward for banks seeking to engage in them. It is unclear whether the agencies will issue further guidance or direction to banks engaged or considering engaging in such activities.
In recent years, certain banks have expressed interest in or have engaged in crypto-asset-related activities or have provided banking services to crypto-asset firms. Some crypto-asset firms have sought or received banking charters. The OCC issued a number of interpretive letters in 2020 and early 2021, acknowledging that it is legally permissible for national banks to provide cryptocurrency custody services, hold stablecoin reserves, participate as nodes in distributed ledgers, and use stablecoins. The OCC also approved the conversion or conditional chartering of several banks engaged in crypto-asset-related activities.
Since then, however, the OCC and other banking agencies have adopted a more conservative approach. In a subsequent interpretive letter, for instance, the OCC emphasized the fact that any banking activities, including crypto-asset-related activities, must be conducted in a safe and sound manner, and directed banks to seek supervisory "non-objection" before engaging in any crypto-asset-related activities. Over the course of 2022, the Federal Reserve and FDIC followed suit, issuing guidance documents that likewise directed banks to seek prior notice before engaging in these activities and noting that regulators would provide "relevant supervisory feedback."
The Joint Statement on Crypto-Asset Risks to Banking Organizations ("Statement") is the agencies' most explicit and clear articulation of their policy approach to crypto-asset-related activities. Consistent with past guidance and in response to market developments in 2022, the agencies identify a number of risks associated with these activities in the Statement, including fraud, run risk, and immature risk management and governance practices. Accordingly, the agencies note the importance of preventing risks related to the crypto-asset sector that cannot be mitigated or controlled from migrating to the banking system.
The Statement goes beyond past guidance in expressing the agencies' current views on safety and soundness:
Based on the agencies' current understanding and experience to date, the agencies 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.
This conclusion could be read to apply to some activities previously identified as legally permissible by the OCC as well as other crypto activities upon which the OCC (or other banking agencies) have yet to opine publicly. The agencies also state that they 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." Notwithstanding the disclaimer about banks being neither prohibited nor discouraged from providing banking services to customers of any specific class or type, the Statement raises doubt as to whether there is a viable path forward for banks to engage in crypto-asset-related activities or serve crypto-related firms in anything other than a limited fashion.
These blanket safety and soundness pronouncements create a high bar for banks seeking to engage in these activities. They raise, rather than answer, a number of questions: (1) What does "safety and soundness" mean in the context of crypto activities, including traditional banking activities like custody, payments, and deposits? (2) Who is responsible for defining it—the bank, its regulators, or both? (3) Are banks currently engaged in crypto activities acting in an unsafe or unsound fashion? (4) What about banks providing traditional banking services to crypto firms? Given the confidential nature of the supervisory process, and the lack of detail and clarity in the joint statement, the public can only guess, and banks are likely to be discouraged from pursuing crypto activities.
Two Key Takeaways
- The Federal Reserve, FDIC, and OCC have stated that issuing or holding crypto-assets is "highly likely to be inconsistent with safe and sound banking practices," and they 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."
- Banks should be cautious in whether and how they proceed with crypto activities or serve crypto firms, and be prepared for supervisory criticism.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
