US Federal Reserve Creates “Novel Activities Supervision Program,” Targets Digital Assets and Tech Partnership with Financial Services Provided by “Nonbanks”

The US Federal Reserve has announced the creation of the Novel Activities Supervision Program that will be “risk-focused” and in addition to current regulatory processes. The Fed said the Program will focus on “crypto-assets, distributed ledger technology (DLT), and complex, technology-driven partnerships with nonbanks to deliver financial services to customers.”

Financial innovation, or Fintech, can be beneficial, according to the Fed’s announcement. At the same time, these new activities may generate “risks that can materially impact the safety and soundness of banking organizations.”

Outlined in the statement are the following areas the Fed will pursue:

  • Complex, technology-driven partnerships with non-banks to provide banking services – Partnerships where a non-bank serves as a provider of banking products and services to end customers, usually involving technologies like application programming interfaces (APIs) that provide automated access to the bank’s infrastructure.
  • Crypto-asset-related activities – Activities such as crypto-asset custody, crypto-collateralized lending, facilitating crypto-asset trading, and engaging in stablecoin/dollar token issuance or distribution.1
  • Projects that use DLT with the potential for significant impact on the financial system – The exploration or use of DLT for various use cases, such as issuance of dollar tokens and tokenization of securities or other assets.
  • Concentrated provision of banking services to crypto-asset-related entities and fintechs – Banking organizations concentrated in providing traditional banking activities such as deposits, payments, and lending to crypto-asset-related entities and Fintechs.

The Fed said it will notify banking organizations that will be subject to examinations under the new program. This will include firms with $10 billion or less in consolidated assets.

The Fed claims that part of the goal is to “enhance its technical expertise” in understanding these activities.

The statement added that the Fed will also allow for innovation that improves the delivery of financial services.

While Fintech has been evolving for multiple years, it appears the Federal Reserve is just waking up to the digitization of financial services. Some countries have pursued a path with an emphasis on collaboration by establishing regulatory sandboxes in which regulated services utilizing new technology can test and iterate while being observed by regulators.

 


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