Fed launches 'Novel Activities Supervision Program' to monitor crypto, DLT, and fintech
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(Kitco News) - The Federal Reserve is looking to increase its oversight of the cryptocurrency industry in the U.S. with the creation of a “Novel Activities Supervision Program” designed to “enhance the supervision of novel activities conducted by banking organizations” under the central bank’s supervision.
According to a letter from the Federal Reserve Board of Governors released Tuesday, the new program “will focus on novel activities related to crypto-assets, distributed ledger technology (DLT), and complex, technology-driven partnerships with nonbanks to deliver financial services to customers.”
The Fed said the program will focus on risk in the market and has been created to complement existing supervisory processes as a way to help strengthen the oversight of novel activities conducted by supervised banking organizations.
“Financial innovation supported by new technologies can benefit the U.S. economy and U.S. consumers by spurring competition, reducing costs, creating products that better meet customer needs, and extending the reach of financial services and products to those typically underserved,” the letter said. “Innovation can also lead to rapid change in individual banks or in the financial system and generate novel manifestations of risks that can materially impact the safety and soundness of banking organizations.”
Due to the novelty of these activities, the Fed said clarification around their permissibility are necessary, and concerns about their effect on the broader financial system have arisen that are not adequately addressed by the existing supervisory approaches.
“The Federal Reserve established the Program to ensure that the risks associated with innovation are appropriately addressed,” the letter said.
Novel activities that the program will focus on include “Complex, technology-driven partnerships with non-banks to provide banking services; Crypto-asset-related activities, such as crypto-asset custody, crypto-collateralized lending, facilitating crypto-asset trading, and engaging in stablecoin/dollar token issuance or distribution; Projects that use DLT with the potential for significant impact on the financial system, such as [the] issuance of dollar tokens and tokenization of securities or other assets; and Concentrated provision of banking services to crypto-asset-related entities and fintechs.”
The program will be used in conjunction with existing Federal Reserve supervisory teams to monitor and examine novel activities conducted by supervised banking organizations. Instead of creating a separate “supervisory portfolio,” the program will “work within existing supervisory portfolios and leverage current supervisory processes to the extent possible to maximize efficiency and minimize burden.”
The level and intensity of supervision that a banking organization receives will be risk-based and depends on the level of their engagement in novel activities. The Fed will issue notifications to those organizations whose activities will be subject to examination through the program.
The central bank will also routinely monitor organizations that are exploring novel activities, and will “periodically evaluate and update which banking organizations should be subject to the examination of novel activities through the Program, and banking organizations will be notified accordingly.”
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A multidisciplinary team of leaders from across the Federal Reserve System has been selected as advisors for the program to help ensure it “is informed by diverse perspectives and best practices in supervision and risk management.” The program will also “engage broadly” with experts in the fields of academia, banking, finance, and technology, to help “stay abreast of emerging issues, technologies, and new products.”
“The Program will incorporate insights and analysis from real-time data, market monitoring, horizontal exams, and proactive, intentional, and regular information exchange across portfolios, federal bank regulatory agencies, and other stakeholders,” the letter said.
The main goal in launching the program is to help the Federal Reserve “enhance its technical expertise to better understand novel activities, the novel manifestations of risks of such activities, and appropriate controls to manage such risks.” The program will also help with the creation of new supervisory approaches and guidance for banking organizations engaging in novel activities.
“The Program will help ensure that regulation and supervision allow for innovations that improve access to and the delivery of financial services, while also safeguarding bank customers, banking organizations, and financial stability,” the Fed said. “The Program will also operate in keeping with the principle that banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation.”