US Fed clarifies process for banks to transact in stablecoins

By Hannah Lang

(Reuters) -State banks that are a member of the U.S. Federal Reserve system should obtain a written supervisory nonobjection from the Fed before issuing, holding or transacting in dollar tokens used to facilitate payments, such as stablecoins, the central bank said in a new supervisory letter Tuesday.

The Fed also said it is creating a new supervisory program to oversee the activities of the banks it supervises related to cryptocurrency, blockchain technology and tech-driven nonbank partnerships, with the aim of complementing its existing supervisory process and strengthening the oversight of tech-driven activities.

The new announcements, which were sent Tuesday to supervisory and examination staff at Federal Reserve banks and state member banks, comes just a day after payments giant PayPal (NASDAQ:) announced it would launch its own stablecoin, a type of cryptocurrency typically pegged to a traditional asset, often the U.S. dollar.

Prior attempts by major mainstream companies to launch stablecoins have met fierce opposition from financial regulators and policymakers. Meta’s, then Facebook (NASDAQ:), 2019 plans to launch a stablecoin, Libra, were foiled after regulators raised fears it could upset global financial stability.

For banks to receive a written nonobjection to be able to engage with stabelcoins, banks should demonstrate appropriate risk management, including having systems in place to identify and monitor any potential risks, including cybersecurity and illicit finance threats, according to the Fed.

After receiving a written nonobjection, state member banks engaging in dollar token-related activities will continue to be subject to supervisory review as well as heightened monitoring of those activities, the Fed said.

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