On January 27, 2023, the Board of Governors of the Federal Reserve System (“Federal Reserve”) issued a policy statement regarding the permitted activities of state-chartered banks that are members of the Federal Reserve System (“Crypto Policy”).one The Crypto Policy is the first formal interpretation of whether the Federal Reserve believes crypto asset activities are permissible for banking organizations.
While the Crypto Policy applies to all state member banks, it is most relevant to uninsured state member banks (meaning those state member banks whose deposits are not insured by the Federal Deposit Insurance Corporation (“FDIC”) )), which have increased in visibility following Wyoming’s adoption of a special purpose depository institution statute option that does not require federal deposit insurance.2 The Cryptography Policy restricts the activities of uninsured state member banks to be the same as insured state banks. This will have the practical effect of discouraging uninsured state banks from seeking membership in the Federal Reserve System as a way to engage in novel activities, such as those involving crypto assets, and gain access to Federal Reserve services (for example, payments through FedWire) . It also continues to exclude a number of crypto asset activities for all state member banks.
The Cryptocurrency Policy will become effective upon publication in the Federal Register, which is expected shortly. In this Legal Update, we provide background on federal regulation of bank involvement in crypto assets and outline the Crypto Policy.
Prior to November 2021, the Office of the Comptroller of the Currency (“OCC”) had authorized national banks and federal savings associations to engage in certain crypto asset activities. Since November 2021, federal banking regulators have been increasingly suspicious of the crypto-asset activities of banking organizations.3 The OCC narrowed the scope of its preclearances, each federal banking regulator imposed notification/approval prerequisites for cryptoassets, and the Federal Reserve and OCC issued approval orders implying that certain cryptoasset activities are not permitted for banking organizations. .4 However, federal banking regulators continued to express their willingness to consider whether certain crypto-asset-related activities conducted by banking organizations are legally permitted and, if so, the regulators’ expectations for safety and soundness, consumer protection, and regulatory compliance. existing laws.
Most recently, an uninsured state chartered bank in Wyoming applied to become a member of the Federal Reserve System.5 This bank intended to offer crypto custody, business deposit accounts, and a stablecoin-like payment product. To facilitate the offering of these products, the bank sought access to the payment system operated by the Federal Reserve, which is available to member banks and other depository institutions.
While there is question as to whether an uninsured state-chartered bank is a depository institution (and, if so, the discretion of the Federal Reserve to deny access to payment services), a state-member bank is presumably eligible to access Federal Reserve services by virtue of their membership in the system (again, possibly subject to Federal Reserve discretion). Therefore, by becoming a state member bank, an institution could avoid the question of whether it is eligible. However, the whole issue is arguably moot given the position laid out in the Crypto Policy, which, notably, was issued on the same day the Wyoming bank’s application for membership was rejected by the Federal Reserve.6
Federal Reserve Crypto Policy
In general, domestic banks may only engage in activities that the OCC has determined are permissible for domestic banks. State insured banks, including state insured member banks, generally may only engage in activities that are permissible for a national bank, unless the activity has been explicitly authorized by the FDIC. However, uninsured state member banks are not explicitly subject to any activity restrictions.
The Cryptocurrency Policy invokes the authority of the Federal Reserve under the Federal Reserve Act to restrict the activities of member state banks, regardless of insurance status, to those of insured state banks.7 Accordingly, an uninsured state member bank may not engage in activities unless permitted for a national bank or insured state bank, or authorized by the Federal Reserve. In addition, the Federal Reserve will assume that activities that are not permitted for a national bank or an insured state bank are also not permitted for an uninsured state member bank.
The Cryptocurrency Policy reiterates that even if an activity is permitted for a state member bank, it must be conducted under the same terms, conditions, and limitations that would apply to a national bank conducting the activity. In addition, a state member bank must conduct all parts of its business in a safe and sound manner that meets risk management, anti-money laundering, and consumer protection requirements. And for novel activity, there is an additional affirmative obligation on the member state bank to demonstrate to the Federal Reserve that the bank can effectively manage the risks of the activity.
The preamble to the Crypto Policy makes it clear that the impetus for its issuance is the risk of crypto asset activities. It states that the Federal Reserve has received inquiries regarding the permissibility of certain crypto-related activities for member state banks. However, the preamble further states that the Fed “has not yet been presented with facts and circumstances that warrant rebutting its presumption” that crypto-asset activities are not permitted unless authorized by the OCC or FDIC.
In particular, the Cryptopolitics preamble discusses the views of the Federal Reserve on two activities related to crypto assets.
First, it states that the Federal Reserve has not identified any authority that allows national banks to hold most crypto assets, including bitcoin and ether, as principal in any amount, and notes that there is no federal statute or rule that expressly allows state banks to hold crypto assets as principal. Therefore, the Federal Reserve would allegedly prohibit member state banks from engaging in such activity.
Second, it provides that certain state member banks have proposed to issue dollar-denominated tokens (dollar tokens) using distributed ledger or similar technologies. The Federal Reserve recognizes that this activity may be permitted for domestic banks that meet the conditions of the OCC precedent. However, the Federal Reserve believes that the issuance of tokens on open, public, and/or decentralized networks, or similar systems, is most likely inconsistent with safe and sound banking practices. So while this activity may be permitted for member state banks, it appears that the Federal Reserve’s position is that certain releases will never be safe enough for a member state bank to participate in.
As noted, the Crypto Policy is the first formal interpretation of whether the Federal Reserve believes crypto asset activities are permissible for banking organizations. It casts a wide net and appears to exclude several crypto asset proposals from member state banks. In addition, it responds to the rise of Wyoming’s special purpose depository institutions and fills a gap in the federal activities framework by limiting uninsured state member banks to the same activities as insured state banks.
In particular, the Crypto Policy does not address the permissibility of crypto asset activities for bank holding companies. Bank holding company activities are governed by a separate federal framework that tends to be more lax than bank powers. One could speculate that there is still an opportunity for the Federal Reserve to become more open to crypto asset activities by bank holding companies. However, given the tone of the Cryptocurrency Policy and the agency’s other actions and statements regarding the cryptocurrency sector, we believe it is more likely that the Federal Reserve will apply a similar restrictive framework to bank holding companies.
Finally, the Encryption Policy does not govern the OCC or the FDIC. This means that those agencies could authorize banks to engage in a wide range of activities related to crypto assets. However, federal banking regulators have moved in unison since November 2021, and for the foreseeable future, the OCC or FDIC is unlikely to take a more permissive approach than the Federal Reserve did on cryptocurrency policy.
one Federal Reserve, Policy Statement on Section 9(13) of the Federal Reserve Act (January 27, 2023) (be encoded in 12 CFR § 208.112), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230127a.htm.
2 Currently, there is only one uninsured state member bank, a central securities depository that was established in the 1970s.
3 Please see our November 2021 Pivot Legal Update: https://www.mayerbrown.com/en/perspectives-events/publications/2021/11/us-banking-regulators-release-roadmap-for-cryptorelated-activities- by-banks.
4 Please see our Legal Update on these restrictions: https://www.mayerbrown.com/en/perspectives-events/publications/2023/01/hitting-a-moving-target-federal-banking-regulators-latest-commentary-on- crypto assets risks.
5 While the vast majority of states require banks to obtain federal deposit insurance to receive deposits, Wyoming recently enacted a special purpose depository institution charter regime that does not require deposit insurance for certain deposit-taking activities. .
6 Watch Press release, The Federal Reserve Board announces the denial of Custodia Bank, Inc.’s application to become a member of the Federal Reserve System (January 27, 2023), https://www.federalreserve.gov/newsevents/pressreleases/orders20230127a.htm. The Federal Reserve Bank of Kansas City also denied the Wyoming bank’s request for access to Federal Reserve services, although the language of the denial has not been made public. Watch jon Hill, Federal Reserve Rejects Custodial Offers for Membership, Master AccountLaw360 (January 27, 2023), https://www.law360.com/articles/1570195.
7 Watch 12 USC § 330. The Cryptographic Policy notes that if the FDIC, by rule, allows insured state banks to engage in the activity, Federal Reserve approval will not be required to establish permissibility. However, if the FDIC allows activity for only one particular bank, separate approval from the Federal Reserve will be required for all other member banks in the state.