The Federal Reserve Board is providing additional information on a program it created to supervise novel activities in the banks it oversees. The Novel Activities Supervision Program will focus on activities related to crypto-assets, distributed ledger technology (DLT) including blockchain, and complex, technology-driven partnerships with nonbanks to deliver financial services to customers.
The goal of the program, which will be integrated into the Fed’s existing supervisory processes, is to advance the benefits of financial innovation while addressing risks to the safety and soundness of the banking system.
“Financial innovation supported by new technologies can … lead to rapid change in individual banks or in the financial system and generate novel manifestations of risks that can materially impact the safety and soundness of banking organizations,” the board wrote in a letter to its supervised banks. “Given the novelty of these activities, they may create unique questions around their permissibility, may not be sufficiently addressed by existing supervisory approaches, and may raise concerns for the broader financial system.”
The Novel Activities Supervision Program will focus on the following activities:
- Complex, technology-driven partnerships with non-banks to provide banking services – These include partnerships with non-bank providers of banking products and services, usually involving automation technologies like application programming interfaces.
- Crypto-asset related activities – These include crypto-asset custody, crypto-collateralized lending, crypto-asset trading, and stablecoin/dollar token issuance or distribution.
- Projects that use DLT with the potential for significant impact on the financial system – This includes the exploration or use of DLT for the issuance of dollar tokens and tokenization of securities or other assets.
- Concentrated provision of banking services to crypto-asset-related entities and fintechs – These are defined as banking organizations lending to crypto-asset-related entities and fintechs.
The program will be risk-based, according to the Fed, and the level of supervision will vary based on the level of engagement in novel activities. The Federal Reserve will notify those banking organizations whose activities will be subject to examination and will routinely monitor banking organizations that are exploring novel activities.
The program will be advised by a range of multidisciplinary leaders from the Federal Reserve System and by external experts from academia and the banking, finance, and technology industries. It will use analysis from real-time data, market monitoring, horizontal exams, and information exchanged across portfolios, federal bank regulatory agencies, and other stakeholders.
In addition to enhancing the supervision of risks associated with banking organizations engaging in novel activities, the program will also inform the development of supervisory approaches and guidance for banking organizations engaging in novel activities, according to the Fed.
“The program will help ensure that regulation and supervision allow for innovations that improve access to and the delivery of financial services, while also safeguarding bank customers, banking organizations, and financial stability,” the letter stated.