The Federal Reserve Board released additional information on its program to supervise novel activities in the banks it oversees, including stablecoin activity.

Novel Activities: The Fed board said:

  • Novel activities include complex, technology-driven partnerships with nonbanks to provide banking services to customers as well as activities that involve crypto assets and distributed ledger or "blockchain" technology.

  • The goal of the novel activities supervision program is to foster the benefits of financial innovation while recognizing and appropriately addressing risks to ensure the safety and soundness of the banking system.

  • The program will be integrated into the Fed's existing supervisory processes, with program experts working alongside current supervisory teams to oversee banks engaged in novel activities.

Token Safeguards: The Fed board also provided additional information on the process for a state bank supervised by the Fed to follow before engaging in certain dollar token or stablecoin activity, including demonstrating to its Fed supervisors that it has appropriate safeguards to conduct the activity safely and soundly.

Fed Policy Statement: The Fed said the announcements are in line with its January policy statement clarifying that its regulatory limitations apply to both insured and uninsured depository institutions. That policy statement also said crypto activities—such as issuing stablecoins on decentralized networks—are “highly likely to be inconsistent with safe and sound banking practices.”

PayPal Stablecoin: The Fed release follows this week’s announcement from PayPal that it is entering the stablecoin market. PayPal said its PYUSD stablecoin is based on the Ethereum blockchain, will be available via the PayPal app and website, and will be compatible with other third-party payment services, such as Venmo.

Custodia Denial: The Fed in January denied special-purpose depository institution Custodia Bank’s application to become a Fed member and to have a master account with the Kansas City Fed. ICBA commended the Fed’s response to the Custodia application in a national news release, saying the agency’s actions appropriately safeguard the banking system from the risks posed by institutions with novel charters and the crypto sector.