The House Financial Services Committee has sent a letter to Federal Reserve (Fed) Chair Jerome Powell expressing concerns about two recent Fed supervision and regulation letters regarding digital assets.
The latter two letters, titled “Creation of Novel Activities Supervision Program” (SR 23-7) and “Supervisory Nonobjection Process for State Member Banks Seeking to Engage in Certain Activities Involving Dollar Tokens” (SR 23-8), went out on August 8, 2023.
The Financial Services Committee vs. the Fed
The first of those letters establishes a formal program to enhance oversight of emerging fintech activities in banking. The Novel Activities Supervision Program will include a focus on:
“…crypto-asset custody, crypto-collateralized lending, facilitating crypto-asset trading, and engaging in stablecoin/dollar token issuance or distribution.”
The second of the letters outlined a supervisory approval process requiring state member banks to demonstrate adequate risk management capabilities before issuing, holding, or transacting in dollar-backed stablecoins.
Banks must receive written non-objection from the Fed prior to engaging in these emerging activities, which will undergo heightened monitoring.
The Fed Recently Published Two Controversial Letters
The Committee wrote of its concern that these actions may undermine progress made by Congress to establish a regulatory framework for payment stablecoins. Currently, Congress is grappling with multiple standalone crypto bills that could give much-needed clarity to the industry.
They said if the letters remain in place, it could deter financial institutions from participating in the digital asset ecosystem.
The letter states that Congress understands the need to provide regulatory certainty for payment stablecoins and digital assets. It also mentions that this recognition led to the Clarity for Payment Stablecoins Act. The Committee had positive things to say about the bill.
However, the Committee wrote that instead of working with Congress, less than two weeks after the Committee’s action, the Fed released the two letters. The Committee believes the letters effectively prevent banks from issuing payment stablecoins or engaging with digital assets.
Additionally, the letters were not issued in accordance with the process set forth by the Administrative Procedure Act. Or so the Committee argued.
Financial Services Committee Angry About Perceived Overreach
The letter states this represents an effort by the Federal Reserve to set policy without being held accountable. Under the US separation of powers, creating laws is the purview of the legislative branch, namely Congress.
However, with crypto and blockchain having emerged relatively quickly, the legislative branch has often been unable to keep track. In that gap, federal bodies like the SEC have often felt the need to step in and apply existing laws. This, in turn, has led to accusations from elected representatives that regulators are making policy up on the hoof.
Furthermore, the Committee included a list of questions for Chair Jerome Powell about the rationale and intentions behind the two letters.
It also requested documents related to the drafting of the letters. The Fed has yet to respond to the body’s inquiries.
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