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Fed Issues Guidelines for Banks Engaging in Crypto Activities

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Given that more banks in the United States are now seeking to expand exposure to the digital asset world, the Federal Reserve has issued additional guidelines to be followed by banks, considering activities involving cryptocurrencies.

In a supervisory letter, the Fed stated, “The emerging crypto-asset sector presents potential opportunities to banking organizations, their customers, and the overall financial system; however, crypto-asset-related activities may pose risks related to safety and soundness, consumer protection, and financial stability.”

The Fed has, thus, outlined the steps that the Board-supervised banks need to take before engaging in crypto-asset-related activities.

The letter stated that a Fed-supervised banking organization engaging or seeking to engage in crypto-asset-related activities should notify its lead supervisory point of contact at the Federal Reserve.

Also, prior to engaging in any crypto-asset-related activity, a supervised banking organization must ensure such activity is legally permissible and determine whether any filings are required under applicable federal or state laws.

Prior to engaging in these activities, banks should have adequate systems, risk management, and controls to conduct such activities in a safe and sound manner and consistent with all applicable laws, including applicable consumer protection statutes and regulations.

Last year, the Board, the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation released an interagency statement regarding their crypto-asset policy initiative. The regulators said that they intended to clarify in 2022 as to which activities the banks could engage in involving crypto, including whether they would be allowed to hold digital assets on their balance sheets and facilitate crypto trades on behalf of customers.

The Digital Asset Space and Rising Competition

Until July 2020, the OCC did not grant permission to banks in the United States to hold cryptocurrencies. The amendment post-July gave banks the go-ahead to begin exploring cryptocurrency operations.

A few years ago, banks were not that interested in the crypto and digital asset space. But now, after witnessing an increase in demand for the emerging market, banks and financial institutions are embracing cryptocurrencies.

This March, JPMorgan (JPM - Free Report) decided to make a “strategic investment” in TRM Labs, a leader in blockchain intelligence. JPM announced that it would invest in the blockchain analysis firm’s crypto compliance and risk management technology.

Moreover, JPMorgan opened a virtual lounge named “Onyx lounge” in Decentraland (a virtual world based on blockchain technology), thus, becoming the first bank in the United States to enter the metaverse. Within Decentraland, users can acquire virtual plots of land in the form of non-fungible tokens, making purchases using cryptocurrency backed by the Ethereum blockchain.

Apart from these, JPM has been undertaking other initiatives to expand its presence in the emerging market. In July 2021, JPM became the first major bank in the United States to allow its financial advisors to give all its wealth-management clients access to cryptocurrency funds. Then, it came to light that JPMorgan was offering its Private Bank wealth management customers access to an in-house passively managed bitcoin fund. The offering was being made in partnership with bitcoin powerhouse New York Digital Investment Group.

Likewise, Citigroup (C - Free Report) announced in November 2021 that it would hire 100 additional people in its blockchain and digital assets division.

Citigroup, which has been long planning to enter the crypto space, began offering digital asset services for its wealthy clients with the launch of the business offshoot — Digital Assets Group. The division, part of Citigroup’s wealth management division, focuses on cryptocurrencies, NFTs, stablecoins and central bank digital currencies.

Among others, Goldman Sachs (GS - Free Report) launched trading with non-deliverable forwards, i.e., derivatives tied to Bitcoin’s price, which are cash-settled. Goldman Sachs is shielding itself from the cryptocurrency fluctuations by trading Bitcoin futures in block trades on CME Group Inc., with Cumberland DRW as its trading partner.

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