Fed warns banks to check legality of crypto-related activity

WASHINGTON — 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., pushed the OCC to rescind Trump-era guidance about banks' involvement in the space. 

Bloomberg News

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.

In the supervisory letter, the Fed said that the crypto sector "presents potential opportunities to banking organizations." The regulator also lists novel technology, anti-money-laundering concerns and consumer protection as potential risks to banks' involvement in the crypto sector. 

The letter alludes to the issue of misrepresenting deposit insurance regarding crypto companies, a growing area of concern for regulators after the bankruptcy of the crypto firm Voyager. The FDIC has warned that banks could be harmed when cryptocurrency companies that offer digital assets as well as banks' deposit products overstate the protections of federal deposit insurance. 

"Banking organizations engaging in crypto-asset-related activities face potential legal and consumer compliance risks stemming from a range of issues, including, for example, uncertainty regarding the legal status of many crypto-assets; potential legal exposure arising from consumer losses, operational failures, and relationships with crypto-asset service providers; and limited legal precedent regarding how crypto-assets would be treated in varying contexts, including, for example, in the event of loss or bankruptcy," the Fed said in its letter. 

Voyager is the tip of the iceberg

One day before 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 the Wyoming-chartered crypto firms Custodia and Kraken, how to access the payment rails without needing intermediary banks.