The Federal Reserve approves crypto trading by financial institutions

The Federal Reserve approves crypto trading by financial institutions

In a joint statement that aims to highlight crypto risks, the Federal Reserve Banks nonetheless clarified that commercial banks could provide crypto-related services.

"Banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation. The agencies are continuing to assess whether or how current and proposed crypto-asset-related activities by banking organizations can be conducted in a manner that adequately addresses safety and soundness, consumer protection, legal permissibility, and compliance with applicable laws and regulations, including anti-money laundering and illicit finance statutes and rules. Based on the agencies’ current understanding and experience to date, the agencies believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and decentralized network or similar system is highly likely to be inconsistent with safe and sound banking practices. Further, the agencies have significant safety and soundness concerns with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector."

The Federal Reserve System said, alongside other entities that supervise commercial banks and the monetary system.

The Federal Reserve approves crypto trading by financial institutions

However, they did warn that keeping cryptocurrency in one's possession is “highly likely” to be risky. The term “holding” is commonly used to refer to someone who possesses secret codes. Instead of the bank “holding” the assets, a third-party custodian such as Revolut would be “holding” them. They shouldn't, as the word “highly likely” implies, but there's no hard and fast rule against it. Based on this statement, it would appear that banks are free to offer cryptocurrency services so long as they follow safe and sound practices, such as obtaining insurance if they are holding or using an insured custodian.

The Bank for International Settlement (BIS), an organization that typically oversees central banks, has given the go-ahead for commercial banks to keep between 1% and 2% of their tier 1 capital in cryptocurrency. In addition, the BIS acknowledged that banks could use crypto as a hedge and placed no restrictions on using stablecoins as a form of crypto. After these changes, we can expect to hear more about the 'safe' integration of cryptocurrencies into the financial system.

The Bank for International Settlement (BIS)
The Bank for International Settlement (BIS)

Stock, commodity, and bond trading banks that want to compete with Fintechs and challenger banks will eventually incorporate cryptocurrency into their offerings. In addition, cash-settled bitcoin futures, such as those provided by CME, are explicitly permitted by the Fed statement. Still, the bitcoin-finance space is becoming increasingly sophisticated and will likely continue progressing in this direction. Consequently, it appears the issuer of fiat will not quite stand in their way, suggesting that the banking system may be beginning to become crypto-neutral.

Disclaimer: Nothing on this site should be construed as a financial investment recommendation. It’s important to understand that investing is a high-risk activity. Investments expose money to potential loss.



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