Recently, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued a joint statement on the risks posed to banks by crypto-assets (the “Statement”). In short, the Statement highlights the risks and scrutiny that banks face when engaging with digital assets, but does little to change the current regulatory landscape.
In recent years, banks have engaged in a number of crypto-related activities, including:
- Custody: Banks have custodied customers’ digital assets, often by partnering with a third-party FinTech custodian services provider.
- Banking Crypto: Banks provide deposit accounts, loans, and other products or services to companies in the crypto industry.
- Settlement Networks: Banks have explored using private, permissioned ledgers to settle transactions on behalf of customers.
- Direct Investment: Banks have considered whether they could hold bitcoin, Ethereum, and other digital assets on their balance sheets.
Of these four activities, the Statement only seems to per se prohibit direct investment in digital assets. Specifically, in the Statement, the regulators concluded that certain activities—“issuing” and “holding as principal” crypto assets stored on an open, decentralized ledger—are likely incompatible with safe and sound banking practices. Holding crypto on the bank’s balance sheet or issuing your own bank-specific token, therefore, are likely not permissible. The regulators also expressed “concern” with respect to banks’ business models that are either concentrated in crypto-asset-related activities or have concentrated exposure to the crypto-asset sector. Therefore, if a large percentage of a bank’s customers are crypto companies, the bank may also have to address the concentration risk with its regulators.
Banks aspiring to bank crypto companies or that provide crypto-related products and services should already be well aware of the challenges. Demonstrating to regulators how the bank is addressing the relevant risks continues to be a prudent, oft-used approach. This guidance merely clarifies what participants and practitioners have known (or should have known) for many months: banks must crypto with caution.
Past Client Alerts
Client Alert: Banking Crypto: Obtaining Regulatory Permission
Client Alert: FinTech Partnerships Under the Regulatory Microscope
- Client Alert: Digital Wallet Issues & How Banks Can Help
Client Alert: FDIC Publishes Conducting Business with Banks: A Guide for FinTechs & Third Parties
- Client Alert: Offering Banking-as-a-Service?
- Client Alert: New FDIC Guidance on Technology Service Provider (TSP) Contracts
- Client Alert: FinTech Regulatory Update - Bank & FinTech Agreements
- Client Alert: Working with a FinTech? – 5 Things to Know
- Client Alert Update: FinTech & Bank Partnerships
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Barack Ferrazzano Financial Institutions Group attorneys have helped launch numerous partnerships between banks and FinTechs. Please contact us if you are interested in discussing any potential FinTech partnership, software, or vendor.