5 US dollar token risks that the Fed is most concerned about

This week, the Federal Reserve sent a letter to regulatory officials and relevant regulators and inspectors of the Federal Reserve Banks and all state-owned banks in the United States, which announced a new plan to supervise banks’ cryptocurrency activities and further clarified that lenders under its jurisdiction should Approval must be obtained before engaging in digital assets and so-called "Dollar Token" (Dollar Token) activities.

Background on the Federal Reserve's launch of the "New Activities Supervision Program"

The Board of Governors of the Federal Reserve System issued a policy statement in January of this year regarding Section 9(13) of the Federal Reserve Act, which restricts state member banks and their subsidiaries as principals to activities permitted by national banks, and Requires banks to abide by the terms, conditions, and restrictions of the Federal Reserve Bank and its subsidiaries.

The U.S. Office of the Comptroller of the Currency (OCC) specifically recognizes that U.S. domestic banks have the right to use distributed ledger technology or similar technologies as principals for payment activities, including issuing, holding or trading "dollar tokens." However, the OCC limits the legal permissibility of these activities to the extent that banks must demonstrate that they have controls in place to carry out these activities in a safe and sound manner, to the satisfaction of their regulators.

In simple terms, if a bank regulated by the Federal Reserve needs to participate in stablecoin transactions, it first needs to prove to the regulator in advance that it can do so in a "safe and reliable manner", and then needs to obtain formal approval from the Federal Reserve, which is easier said than done But it is not easy to do. After all, it is not easy to prove that it can "identify, measure, monitor and control the risks of its activities", let alone the security breaches related to customer runs and hackers.

So, how will the Fed vet banks within its jurisdiction that wish to handle cryptocurrency activity? let's continue--

**5 **The Fed’s Most Concerned “Dollar Token” Risk

In fact, the Federal Reserve has given a set of so-called "no-objection procedures for dollar token activities". From this set of procedures, we may be able to glimpse a clue:

First, the Federal Reserve requires that jurisdictional banks that engage in cryptocurrency activities (including Fed state member banks that issue, hold, or trade "dollar tokens" to facilitate payments) must have put in place appropriate controls to conduct their activities in a safe and sound manner , in order to verify that this requirement is met, each member bank of the Federal Reserve Board shall receive a written notice of supervisory no objection from the Federal Reserve Board prior to engaging in a proposed activity.

Second, Federal Reserve member banks seeking to participate in such "dollar token" activities (including for testing purposes) must also notify their primary regulatory contacts at the Federal Reserve of the bank's intention to participate in the proposed activity, and should include a review of the proposed activity. Describe the activity. Fed regulators are likely to follow up with the bank for more information to better understand the proposal and the control framework it has put in place. Federal Reserve state member banks will also continue to undergo regulatory scrutiny and enhanced monitoring of these activities upon receipt of written notice of regulatory no objection.

In order to obtain written notice of supervisory no objection, a national member bank shall demonstrate that it has established appropriate risk management practices for the proposed activity, including having systems in place to identify, measure, monitor and control the risks of its activities, and the ability to do so on an ongoing basis ability. Fed staff will also assess whether jurisdictional banks have demonstrated that they understand and will comply with the laws applicable to the proposed activities, and will focus on the risks discussed in the preamble to the policy statement with respect to "dollar tokens," including but not limited to:

**1. Operational risk:**Includes risks related to network governance and oversight; clarity of roles, responsibilities, and obligations of all parties involved; transaction verification process (e.g., timing and finality of transaction settlement, potential impossibility of reversibility and a central authority for transaction records);

**2. Network security risks: **Includes the risks associated with the "USD Token" trading network, the use of smart contracts, and the use of any open source code;

**3. Liquidity risk: **Includes the risk of rapid outflow of deposits caused by a large number of redemptions of "US dollar tokens" in a short period of time;

4. Illegal Financial Risks: Includes risks associated with compliance with the Bank Secrecy Act and OFAC requirements, which include requiring banking institutions to verify customer identities, conduct due diligence to understand the nature and purpose of customer relationships, and Perform continuous monitoring to identify and report suspicious activity;

**5. Consumer Compliance Risk: **Includes risks associated with identifying and ensuring compliance with any consumer protection statutes and regulations applicable to specific USD Token activities.

Summarize

Various policies of the Federal Reserve (such as raising or lowering interest rates) have always had a greater impact on the cryptocurrency market. The "New Activity Supervision Plan" launched this time will make it more difficult for traditional financial institutions such as banks to participate in cryptocurrency transactions. more stringent scrutiny. In the short term, these measures may cause market shocks, but in the long run, they are positive for the healthy development of the entire industry.