Fed Warns Banks Jumping Into Crypto to Do Legal Homework First

Alex Nguyen, Bloomberg News

Light trails from a vehicle in front of the Marriner S. Eccles Federal Reserve building in Washington, D.C., U.S., on Saturday, June 26, 2021. The Federal Reserve might consider an interest-rate hike from near zero as soon as late 2022 as the labor market reaches full employment and inflation is at the central bank's goal. , Bloomberg

(Bloomberg) -- Regulators at the Federal Reserve have a blunt warning for banks looking to take advantage of new opportunities that involve cryptocurrencies: make sure they’re legal first.

The central bank on Tuesday released a supervisory letter recommending steps that lenders overseen by the Fed should take before getting involved in the digital-asset industry. As a starting point, the Fed said, firms should notify the regulator prior to engaging in crypto-related activities and ensure that they comply with rules.

Federal watchdogs have grown increasingly focused on making sure that crypto’s volatility doesn’t have negative impacts on the broader financial system. Meanwhile, traditional financial firms are seeking ways to grow in the fast-growing asset class.

“The emerging crypto-asset sector presents potential opportunities to banking organizations, their customers, and the overall financial system; however, crypto-asset-related activities may also pose risks related to safety and soundness, consumer protection, and financial stability,” said the statement from Michael Gibson, director of the Fed’s division of supervision and regulation, and Eric Belsky, who leads the consumer and community affairs unit.

Earlier this week, the Fed issued guidance for how it will evaluate applications from financial institutions to use the central bank’s accounts and payment services. A push for access by crypto firms has become a hot-button political issue in Washington.

(Updates with information on Fed guidelines released on Monday in final paragraph.)