The Federal Reserve Board just lately issued two Supervision and Regulation Letters that present steering on the company’s supervision of novel actions and the method comparable to fintech partnerships, crypto-related actions, and actions utilizing distributed ledger or blockchain expertise.
In SR Letter 23-7, the FRB introduced the institution of its new Novel Actions Supervision Program deal with (i) technology-driven partnerships with non-banks; (ii) crypto-asset associated actions comparable to asset custody, crypto-collateralized lending, asset buying and selling, and crypto issuance and distribution; (iii) exploration or use of distributed ledger expertise; and (iv) focus of banking companies to crypto-asset associated entities and fintechs. This system is designed to “be certain that the dangers related to innovation” supported by new applied sciences are managed appropriately by the financial institution the place the extent and depth of supervision below the Program will differ primarily based on the banking group’s degree of engagement in novel actions.
In SR Letter 23-8, the FRB offers an outline of the supervisory nonobjection course of for state member banks searching for to have interaction in sure actions involving tokens denominated in nationwide currencies and issued utilizing distributed ledger expertise or related applied sciences to facilitate funds (greenback tokens). The letter clarifies that any financial institution supervised by the Fed that needs to have interaction in those self same actions should first receive a written discover of supervisory nonobjection from the Fed. So as to take action, the financial institution should be capable to show it has applied ample danger administration practices, considering operational, cybersecurity, liquidity, illicit finance, and shopper compliance dangers, amongst others.
Placing It Into Follow: Whereas broader in scope, it’s notable that the FRB is categorizing bank-fintech partnerships as a “novel exercise” topic to the brand new supervisory program. As such, banks concerned with revolutionary fintech services ought to anticipate inquiries from the FRB. Earlier than that occurs, impacted firms ought to contemplate (i) figuring out all “novel actions,” whether or not they’re merchandise, companies, or relationships; (ii) reconfirming whether or not present compliance ensures applicable controls addressing the dangers expressed within the FRB’s newest letters, and replace compliance the place applicable; and (iii) aligning the financial institution general technique concerning engagement in novel actions with that of the FRB.
Along with oversight by prudential regulators, fintechs and their financial institution companions ought to proceed to remain abreast of state “true lender” instances and associated laws, which can require contractual and operational shifts sooner or later as legislators and regulators proceed their efforts to rein in alleged evasions of state legal guidelines manifested via financial institution partnership preparations.
