• The US Federal Reserve has expanded its Novel Activities Supervision Program.
• This program will now tight place crypto under its scrutiny across the board.

In the latest move to limit the interaction of banks with cryptocurrency, the United States Federal Reserve has decided to expand the scope of its Novel Activities Supervision Program.

According to a statement by the Fed on Tuesday, this program was designed to boost the oversight of activities involving crypto and blockchain technology in connection to the lenders which the agency oversees. Specifically, the supervision program will limit certain crypto-related activities and promote a fairground for banks that are committed to servicing the digital asset ecosystem.

Shortly after the Federal Reserve, Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency expressed concerns about the volatility of the cryptocurrency industry, the board introduced a policy statement that mandated all Fed-supervised banks to be guided by the same crypto-related limitations. U.S. regulators also denied the application of a crypto firm to join the Fed system.

These officials were concerned about the migration of uncontrolled risks from the nascent crypto industry to the banking system. Howard Fischer, a New York-based partner at the law firm Moses Singer further explained that regulators are apprehensive that such arrangements will put the traditional banking system at risk.

At the time, many crypto players regarded the policy as being hostile to the asset class. However, Fischer added that the Fed’s stance would not change until the digital asset industry is regulated the same way as the banking system.

New Regulation Program to Address Crypto-related Risks

This new supervision program seems to be an additional measure to the Fed’s effort to monitor the crypto ecosystem in the United States and achieve the goal of traditional bank-inclined regulation.

Some of the areas regulated under the program are crypto custody, lending, trading, issuance, or distribution of crypto including stablecoins. In addition, the program is focused on bank partnerships with organizations that are not exactly lenders like fintech companies, to provide services to customers.

As stated by the Fed, 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. Consequently, state-chartered banks would be required to get the signature of the central bank before issuing, holding or transacting in stablecoins to facilitate payments.

Precisely, lenders must first inform the Fed in the case of any potential stablecoin activity, then wait for “a written notification of supervisory non objection” before proceeding with the transaction. These state-chartered banks would prove that they have put appropriate measures in place to safeguard customers by mitigating risks, including liquidity, cybersecurity, and illicit finance risks. They must also demonstrate that they have the capacity to continue to monitor these issues in the long run.

While these broad measures are crucial to ensure the crypto industry is not at risk again, they can also limit participation from firms across the board.