US Federal Reserve Strengthens Oversight and Guidance for Stablecoins and Crypto Activities

US Federal Reserve Strengthens Oversight and Guidance for Stablecoins and Crypto Activities

The central bank is intensifying its efforts to oversee all cryptocurrency activities within the network of banks under its purview.

On Tuesday, the Federal Reserve released a statement introducing forthcoming guidelines for chartered banks engaged in transactions involving dollar-pegged stablecoins.

Specifically, the Fed aims to closely monitor the process of validating transactions, focusing on aspects like the timing and conclusiveness of transaction settlements, the potential for transactions to be irreversible, and the central control over transaction records.

Practices such as address blacklisting and reversible transactions are already prevalent among major stablecoin issuers in the industry, including Tether and Circle. Notably, PayPal’s recent entry into the stablecoin market suggests that the company plans to adopt similar features for its own product.

The statement alludes to the Fed’s intention to implement measures for client verification (KYC) and to ensure that nationally-chartered banks demonstrate effective strategies for managing risks.

These strategies encompass verifying that issuers hold adequate liquidity to meet redemption demands, a clear response to significant bank runs that have affected the crypto sphere in the past two years, such as the Terra UST stablecoin incident and the FTX debacle.

Additionally, the US central bank has revealed its plans to bolster its supervision of the “novel activities” conducted by banks within its jurisdiction that involve cryptocurrencies, crypto companies, or blockchain technology.

This new supervisory initiative will be seamlessly integrated into the Federal Reserve’s existing oversight mechanisms, as mentioned in the statement. It will also involve extensive engagement with external experts from academia, as well as the banking, financial, and technology sectors.

Furthermore, Federal Reserve supervisors will leverage real-time data, continuously monitor the market, conduct audits, and facilitate regular information exchange across portfolios, federal banking regulatory agencies, and other relevant stakeholders.

The market’s response to this announcement has been positive, with most leading cryptocurrency holders witnessing modest gains, according to data from CoinGecko.

Decrypt sought clarification from the central bank regarding whether this move signals a step towards comprehensive legislation and enhanced clarity for crypto enterprises in the United States. However, an immediate response was not received.

The Complex Path of Cryptocurrency Regulation in the US Thus far, Washington’s stance towards the crypto industry has been characterized by a mixture of ambiguity and hostility, as numerous regulatory bodies have been hesitant to provide clear guidelines.

Standing out among those adopting a more adversarial approach, the Securities and Exchange Commission (SEC) has adopted what is widely perceived as a method of regulation through enforcement, involving legal actions against crypto firms for alleged violations of securities laws. Prominently, the SEC filed lawsuits against Binance and Coinbase in June.

The Federal Reserve has not escaped criticism either. In July, Caitlin Long, the CEO of Custodia Bank—a company positioning itself as a bridge between the cryptocurrency and traditional banking realms—criticized the central bank for what she deemed as bending its own rules through its FedNow payments service.

Ayden, a fintech firm based in Amsterdam, was one of the initial adopters of FedNow. Notably, it obtained its federal master account in July 2020, a year before gaining approval to establish a branch within the United States.

Ultimately, the industry is currently contemplating whether the Federal Reserve’s recent commitments indicate a shift in Washington’s approach.