Global: US Federal Reserve Outlines Guidelines for Banks in Stablecoin Transactions

State banks within the U.S. Federal Reserve system seeking to partake in transactions involving dollar-backed tokens like stablecoins must secure written supervisory nonobjection from the Fed before initiating such activities. This directive was communicated through a recent supervisory letter issued by the central bank on Tuesday.

Additionally, the Federal Reserve revealed its plans to introduce a new supervisory program aimed at overseeing the activities of the banks it supervises concerning cryptocurrency, blockchain technology, and technology-driven nonbank collaborations. The objective is to enhance its existing supervisory process and bolster oversight of tech-driven undertakings.

This announcement, addressed to supervisory and examination staff at both Federal Reserve banks and state member banks, coincided with PayPal’s recent declaration of its intention to launch its own stablecoin – a form of cryptocurrency usually pegged to traditional assets, often the U.S. dollar.

Prior attempts by prominent mainstream corporations to introduce stablecoins have faced considerable opposition from financial regulators and policymakers. Notably, Meta (formerly Facebook)’s 2019 endeavor to launch Libra, a stablecoin, was thwarted due to concerns raised by regulators about potential disruptions to global financial stability.

To secure the written nonobjection for engaging with stablecoins, banks are required to demonstrate appropriate risk management, including the establishment of systems to identify and monitor potential risks, encompassing cybersecurity and illicit finance threats, as outlined by the Fed.

After obtaining the written nonobjection, state member banks engaging in dollar token-related activities will continue to be subject to supervisory scrutiny, along with heightened monitoring of those activities, the Federal Reserve confirmed.