On January 27, 2023, the Board of Governors of the Federal Reserve System (“Federal Reserve”) issued a policy statement regarding the permissible activities of state-chartered banks that are members of the Federal Reserve System (“Crypto Policy”).1 The Crypto Policy is the first formal interpretation of whether the Federal Reserve believes that crypto-asset activities are permissible for banking organizations.
While the Crypto Policy applies to all state member banks, it is most relevant for uninsured state member banks (i.e., those state member banks the deposits of which 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 charter option that does not require federal deposit insurance.2 The Crypto Policy restricts the activities of uninsured state member banks to be the same as insured state banks. This will have the practical effect of deterring 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 obtain access to Federal Reserve services (e.g., payments through FedWire). It also continues to foreclose a number of crypto-asset activities for all state member banks.
The Crypto Policy will take effect upon publication in the Federal Register, which is expected shortly. In this Legal Update, we provide background on the federal regulation of bank involvement in crypto-assets and describe 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 wary of the crypto-asset activities of banking organizations.3 The OCC narrowed the scope of its prior authorizations, each federal banking regulator imposed prior notification/approval requirements for crypto-assets, and the Federal Reserve and OCC issued approval orders that implied certain crypto-asset activities are not permissible for banking organizations.4 However, the federal banking regulators continued to express a willingness to consider whether certain activities related to crypto-assets conducted by banking organizations are legally permissible, and if so, the regulators’ expectations for safety and soundness, consumer protection and compliance with existing laws.
More 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 offering these products, the bank sought access to the payments system that is operated by the Federal Reserve, which is available to member banks and other depository institutions.
While there is a question of whether an uninsured state-chartered bank is a depository institution (and if so, the Federal Reserve’s discretion to deny access to payment services), a state member bank is presumptively eligible for access to Federal Reserve services by virtue of its membership in the system (again, arguably subject to the Federal Reserve’s discretion). Therefore, by becoming a state member bank, an institution might avoid the question of whether it is eligible. However, the entire issue arguably is moot given the position set forth in the Crypto Policy, which notably, was issued on the same day that the Federal Reserve denied the Wyoming bank’s membership application.6
Federal Reserve Crypto Policy
National banks generally may engage only in activities that the OCC has determined are permissible for national banks. Insured state banks, including insured state member banks, generally may engage only in activities that are permissible for a national bank, unless the FDIC has explicitly authorized the activity. Uninsured state member banks, however, are not explicitly subject to either restriction on activities.
The Crypto Policy invokes the Federal Reserve’s authority under the Federal Reserve Act to restrict the activities of state member banks, regardless of insurance status, to those of insured state banks.7 Accordingly, an uninsured state member bank may not engage in activity unless it is permissible for a national bank or an insured state bank, or has been authorized by the Federal Reserve. Further, the Federal Reserve will presume that activities that are not permissible for a national bank or an insured state bank, are also not permissible for an uninsured state member bank.
The Crypto Policy reiterates that even if an activity is permissible for a state member bank, it must be conducted on the same terms, conditions, and limitations that would apply to a national bank conducting the activity. Further, a state member bank must conduct all parts of its business in a safe and sound manner that complies with risk management, anti-money laundering, and consumer protection requirements. And for a novel activity, there is a further affirmative obligation on the state member 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-asset-related activities for state member banks. However, the preamble further states that the Federal Reserve “has not yet been presented with facts and circumstances that would warrant rebutting its presumption” that crypto-asset activities are not permissible unless they have been authorized by the OCC or FDIC.
In particular, the preamble to the Crypto Policy discusses the Federal Reserve’s views on two crypto-asset-related activities.
First, it states that the Federal Reserve has not identified any authority permitting 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 expressly permitting state banks to hold crypto-assets as principal. Therefore, the Federal Reserve would presumptively prohibit state member banks from engaging in such activity.
Second, it states that certain state member banks have proposed to issue dollar-denominated tokens (dollar tokens) using distributed ledger technology or similar technologies. The Federal Reserve recognizes that this activity may be permissible for national banks that comply with conditions in OCC precedent. However, the Federal Reserve believes that issuing tokens on open, public, and/or decentralized networks, or similar systems is highly likely to be inconsistent with safe and sound banking practices. Therefore, even though this activity may be permissible for state member banks, it seems that the Federal Reserve’s position is that certain versions of it may never be safe and sound enough for a state member bank to engage in them.
As noted, the Crypto Policy is the first formal interpretation of whether the Federal Reserve believes that crypto-asset activities are permissible for banking organizations. It casts a broad net and appears to foreclose several crypto-asset proposals from state member banks. Further, it responds to the rise of Wyoming 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.
Notably, the Crypto Policy does not address the permissibility of crypto-asset activities for bank holding companies. The activities of bank holding companies are governed under a separate federal framework that tends to be more permissive than bank powers. One might speculate that there remains an opportunity for the Federal Reserve to take a more open position to crypto-asset activities by bank holding companies. However, given the tone of the Crypto Policy and the agency’s other actions and statements with respect to the crypto-sector, we believe it more likely that the Federal Reserve will apply a similarly restrictive framework to bank holding companies.
Finally, the Crypto Policy does not govern the OCC or FDIC. This means that those agencies could authorize banks to engage in a wide array of crypto-asset related activities. However, the federal banking regulators have moved in lockstep since November 2021, and for the foreseeable future, it is unlikely that the OCC or FDIC will take a more permissive approach than what the Federal Reserve did in the Crypto Policy.
1 Federal Reserve, Policy Statement on Section 9(13) of the Federal Reserve Act (Jan. 27, 2023) (to be codified at 12 C.F.R. § 208.112), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230127a.htm.
3 See our Legal Update on the November 2021 pivot: https://www.mayerbrown.com/en/perspectives-events/publications/2021/11/us-banking-regulators-release-roadmap-for-cryptorelated-activities-by-banks.
4 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-cryptoasset-risks.
5 While the vast majority of states require banks to obtain federal deposit insurance to take deposits, Wyoming recently enacted a special purpose depository institution charter regime that does not require deposit insurance for certain deposit-taking activities.
6 See Press Release, Federal Reserve Board announces denial of application by Custodia Bank, Inc. to become a member of the Federal Reserve System (Jan. 27, 2023), https://www.federalreserve.gov/newsevents/pressreleases/orders20230127a.htm. The Federal Reserve Bank of Kansas City also denied the Wyoming bank’s application for access to Federal Reserve services, although the text of the denial has not been publicly released. See Jon Hill, Fed Rebuffs Custodia’s Bids for Membership, Master Account, Law360 (Jan. 27, 2023), https://www.law360.com/articles/1570195.
7 See 12 U.S.C. § 330. The Crypto Policy notes that if the FDIC, by rule, permits insured state banks to engage in the activity, no Federal Reserve approval would be required to establish permissibility. However, if the FDIC permits the activity only for a particular bank, separate Federal Reserve approval would be required for all other state member banks.