Scrutinize crypto legal angles before investing, Fed tells banks

The US Federal Reserve Board has issued a stern warning to banks wanting to engage in crypto-related activities, or provide such services. Stressing the need for them to be aware of regulatory standards and guidelines.

In a statement released on Tuesday. The Fed says that while “several banks have expressed interest in providing services related to cryptocurrency.” Such as custody and trading, they need to consider “the legal and regulatory risks” before doing so.

The Board said it is important for banks to develop “an appropriate risk management framework” for any crypto-related activities. And to ensure that their boards of directors are aware of and comfortable with the risks involved.

The Fed’s warning to Board-supervised financial institutions was made in a letter sent on Tuesday. Following several high-profile crypto-related partnerships between BlackRock, the world’s largest asset manager.

“The crypto-asset sector has the potential to create opportunities for banking organizations, their customers, and the financial system as a whole.”

The Fed stated in the release. However, central banks are concerned about the risks that crypto may pose, including consumer protection and financial stability.

While the overall potential for investors is high. The regulator wants banks to first ensure they understand the legal climate and associated criteria before getting involved.

“As with any new product or service, banking organizations should ensure that their crypto-related activities do not pose undue risks to customers, counterparties, or the safety and soundness of the organisation,” it says.

“When offering crypto services or products, banks should consider consumer protection laws and regulations and supervisory expectations related to anti-money laundering compliance.”

This is not the first time that US regulators have warned against getting involved in cryptocurrency. In December last year, the Securities and Exchange Commission (SEC) released a statement cautioning retail investors about crypto investments.

“If you choose to invest in these products, please ask questions and demand clear answers. A digital asset may be offered as a security, commodity, or other investment product. Depending on the circumstances, digital assets may be securities under federal securities laws.

Fed defines steps banks will adhere to

In its supervisory letter, the Fed urged banks to implement measures such as determining whether the cryptocurrency activity in question is “legally permissible.”

This includes “understanding the regulations and supervisory expectations governing each activity; having appropriate risk-management processes and controls in place, and ensuring that the activity is consistent with the bank’s overall business strategy and risk profile.”

They should also check to see whether any regulatory filings are required. Since financial institutions must now notify the central bank before engaging in cryptocurrency-related activities.

In addition to other factors, banking institutions need to consider if they have the right safety systems and controls in place.

“For example, a bank should consider whether its anti-money laundering compliance program captures cryptocurrency activity and, if not, whether such activity falls within the scope of the bank’s customer identification program,” the guidance states.

The Federal Deposit Insurance Corporation (FDIC) last month warned crypto users that. The agency’s deposit insurance does not apply to cryptocurrencies or cryptocurrency firms.

In an apparent attempt to discourage people from investing, this was after the government body asked firms not to mislead customers.

The Federal Reserve Board, the FDIC, and the OCC released a statement on crypto policy in 2021. This statement aimed to provide clarity on crypto regulation across global markets.

The Fed’s guidance to banks is the latest development in the United States cryptocurrency regulation.

Last week, it was reported that the US Treasury Department is mulling over new regulations for cryptocurrency wallets. The proposed rules would require crypto firms to collect identifying information on their users.

This follows reports that the US Securities and Exchange Commission (SEC) is planning to scrutinize cryptocurrency exchanges and initial coin offerings (ICOs).