Domestic Regulatory Environment for Digital Assets Continues to Evolve

Oct. 23, 2023

The significant upheaval in the crypto markets—and its impact on consumers and national security—has accelerated Washington’s attention to digital assets policy. Prudential banking regulators, the White House, and the Treasury Department have pursued a range of intertwining policy initiatives, all with direct consequences for the nation’s community banks.

Crypto Response from Prudential Regulators

In response to last year’s turmoil in the crypto sector, U.S. banking regulators in January issued Joint Statement that cautioned—but did not prohibit—community banks about engaging in crypto-related activities. It described several risks that bankers should consider, including significant fraud and scams, frequent market volatility, and the potential for contagion to quickly spread from one crypto-asset participant to others. The regulators also said they “believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices.”

In February, the regulators followed up with another statement focused on the liquidity risks associated with crypto-assets. They underscored concerns that deposits from crypto-related companies “may pose heightened liquidity risks to banking organizations due to the unpredictability of the scale and timing of deposit inflows and outflows.” Once again, though, the regulators stressed that community banks are “neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation.”

Most recently, the Federal Reserve announced the formation a Novel Activities Supervision Program that will be integrated into its existing supervisory processes. This program will concentrate on the risks posed by new technologies, particularly crypto-assets and “complex, technology-driven partnerships with non-banks to provide banking services.” ICBA continues to work with the Fed to learn more about this program and how community banks may be impacted.

Fed Guidance on ‘Dollar Tokens

In conjunction with this news, the Fed also published guidance for state member banks contemplating what it calls “dollar tokens,” a term that collectively describes stablecoins and tokenized deposits. The Office of the Comptroller of the Currency was the first agency to opine on such activity through Interpretive Letter 1174, which permitted national banks to issue stablecoins and facilitate payment transactions. It subsequently clarified this position with Interpretive Letter 1179, which said stablecoin-related activities are only permissible if “the bank can demonstrate…that it has controls in place to conduct the activity in a safe and sound manner,” which said stablecoin-related activities are only permissible if “the bank can demonstrate…that it has controls in place to conduct the activity in a safe and sound manner.”

This context is important in understanding the Fed’s new guidelines because they direct that any state member bank wishing to engage in stablecoin activities permitted by the OCC are “required to demonstrate, to the satisfaction of Federal Reserve supervisors, that the bank has controls in place to conduct the activity in a safe and sound manner.” To do so, a bank must contact its lead supervisor and obtain a written notification of supervisory nonobjection, though the bank will remain “subject to supervisory review and heightened monitoring of these activities.”

How the latest guidance from the Fed will affect the wider debate about stablecoins is unclear. Some banks continue to pursue an interest in tokenized deposits through industry groups like the USDF Consortium, whereas others are even involved in experiments with the Federal Reserve Bank of New York’s Innovation Center.

President Biden’s Executive Order and CBDC

The prudential regulators were not the only government agencies examining cryptocurrency. Pursuant to President Joe Biden’s executive order on digital assets issued in March 2022, the White House Office of Science and Technology Policy (OSTP) circulated a request for information to help build a National Digital Assets Research & Development Agenda.

The RFI followed earlier work by the OSTP to evaluate key technical considerations about CBDC and to develop policy objectives for a US CBDC system. While noting that the United States has not decided whether to launch a CBDC, the OSTP said that a “focused R&D effort could provide especially significant benefits for better understanding and designing” one.

ICBA has opposed a U.S. central bank digital currency ever since the Fed first sought public feedback on the potential risks and benefits. A CBDC would be highly disruptive to the U.S. economy, pulling deposits from local banks and harming their ability to provide credit. Moreover, a CBDC is simply a solution in search of a problem. FedNow is available to facilitate instant payments, and 96% of US households already have access to a bank account.

With these concerns in mind, ICBA urged the OSTP to prioritize research on how digital assets, especially those associated with a CBDC, affect community banks and the communities they serve. The OSTP has not yet released its final agenda, but it has released a set of objectives, including the goal to prioritize research and development that would be useful in assessing, designing, implementing, and deploying a potential U.S. CBDC.

Treasury CBDC Activities

Meanwhile, work continues elsewhere at the federal level to evaluate CBDC technology. Treasury Under Secretary Nellie Liang in March said a retail CBDC, or one held directly by the public, could contribute to a more competitive and innovative payment system and support financial inclusion. However, she also acknowledged its risks, including harming banks’ ability to lend.

To learn more about the potential benefits or risks of a U.S. CBDC, Liang announced the formation of a new Treasury-led CBDC Working Group. The group will bring together experts from Treasury, as well as the Federal Reserve and White House, to develop “an initial set of findings and recommendations.”

When Treasury will release its first report is unknown, but Treasury’s work remains separate from efforts by the Fed, including a Digital Currency Center co-sponsored by the Federal Reserve Bank of Philadelphia and the University of Pennsylvania.


ICBA continues to monitor the regulatory landscape as it relates to digital assets and to ensure that the voice of community banks is heard as new regulations or guidelines are proposed.