The House Financial Services Committee has voiced its concerns in a letter addressed to Federal Reserve Chair Jerome Powell regarding two recent supervision and regulation letters related to digital assets. The letters in question, titled “Creation of Novel Activities Supervision Program” (SR 23-7) and “Supervisory Nonobjection Process for State Member Banks Seeking to Engage in Certain Activities Involving Dollar Tokens” (SR 23-8), were issued by the Federal Reserve on August 8, 2023.
Novel Activities Supervision Program and Dollar-Backed Stablecoins
The first letter introduces the “Novel Activities Supervision Program,” a formal initiative aimed at enhancing oversight of emerging fintech activities within the banking sector. This program encompasses activities such as crypto-asset custody, crypto-collateralized lending, facilitating crypto-asset trading, and involvement in stablecoin and dollar token issuance or distribution.
The second letter outlines a supervisory process that requires state member banks to demonstrate their capability in managing risks before engaging in activities involving dollar-backed stablecoins. To participate in these emerging activities, banks must obtain written non-objection from the Federal Reserve and adhere to heightened monitoring procedures.
Congressional Concerns and Regulatory Overreach
The House Financial Services Committee expresses apprehension that these actions could potentially hinder the progress made by Congress in establishing a comprehensive regulatory framework for payment stablecoins. Congress is currently considering various standalone cryptocurrency bills aimed at providing clarity to the industry.
The Committee suggests that if the two letters are not revised, they may discourage financial institutions from participating in the digital asset ecosystem. The letter emphasizes that while the need for regulatory certainty for payment stablecoins and digital assets is acknowledged, the Federal Reserve’s recent actions could counteract those efforts.
The Committee alleges that the Federal Reserve released the letters less than two weeks after Congress’s actions and without adhering to the Administrative Procedure Act’s process for issuing such letters.
Calls for Accountability and Documentation
The letter argues that the Federal Reserve’s approach in issuing these letters represents an attempt to shape policy without being held accountable, a function typically reserved for the legislative branch of the US government. The emergence of cryptocurrencies and blockchain technology has sometimes outpaced the ability of the legislative branch to provide timely regulation, leading regulatory bodies like the SEC and the Federal Reserve to step in and apply existing laws.
The Committee concludes by presenting a list of inquiries to Chair Jerome Powell, seeking clarity on the intentions and reasoning behind the two letters. Additionally, it requests relevant documents pertaining to the drafting of these letters. As of now, the Federal Reserve has not provided a response to the Committee’s inquiries.
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In this evolving landscape of digital assets, the interaction between regulatory bodies and legislative bodies is crucial in establishing a balanced and effective regulatory framework that fosters innovation while mitigating risks. The outcomes of such interactions will likely shape the future trajectory of the digital asset industry and its integration into the broader financial system.
