Fed defines banks’ stablecoins transaction process

The Fed also stated it is creating a new supervisory program to administer the activities of the banks it oversees related to crypto currency, blockchain technology and tech-driven nonbank partnerships

U.S. state banks that are a member of the Federal Reserve (Fed) system should secure a written supervisory nonobjection from the Fed before issuing, holding or transacting in dollar tokens used to facilitate payments, such as stablecoins, the central bank stated in a new supervisory letter Tuesday.

The Fed also stated it is creating a new supervisory program to administer the activities of the banks it oversees related to crypto currency, blockchain technology and tech-driven nonbank partnerships, with the goal of supporting its current supervisory process and reinforcing the supervision of tech-driven activities.

The latest announcements, which were sent Tuesday to supervisory and examination staff at Federal Reserve banks and state member banks, comes just a day after global payments major PayPal (PYPL.O) declared it would introduce its own stablecoin, a kind of crypto currency typically pegged to a traditional asset, such as the U.S. dollar.

Earlier efforts by top mainstream firms to introduce stablecoins have met strong opposition from financial regulators and policymakers. Meta’s (META.O), then Facebook, 2019 plans to introduce a stablecoin, Diem (formerly called Libra), were hampered after regulators raised concerns it could disrupt global financial stability.

The Fed stated that for banks to obtain a written nonobjection to be able to deal in stablecoins, banks should demonstrate proper risk management, including having systems in place to recognise and track any possible risks, including cybersecurity and illegal finance threats.

The Fed said that after obtaining a written nonobjection, state member banks dealing in dollar token-related activities will continue to be subject to supervisory evaluation as well as increased monitoring of those activities.