FDIC Develops Transparent Framework for U.S. Banks Engaging in Crypto Activities

According to PANews, the Federal Deposit Insurance Corporation (FDIC) is working on a more transparent framework for U.S. banks involved in crypto asset activities, including the use of public, permissionless blockchains. On April 8, FDIC Acting Chairman Travis Hill addressed the American Bankers Association Summit in Washington, outlining the agency's evolving stance on crypto-related activities. A key area under review involves the interaction between regulated banks and public, permissionless blockchains. Hill acknowledged that while jurisdictions outside the U.S. have permitted banks to use public blockchains for years, U.S. regulators have been more cautious. The FDIC now considers a blanket ban on public blockchain usage too restrictive, though Hill emphasized the need for appropriate safeguards to regulate such activities. The agency is assessing existing interagency guidance, including joint statements from January and February 2023, to establish enduring standards for the responsible use of public networks. The possibility of operating public blockchains in a permissioned mode is also under consideration. Hill noted that regulators must evaluate how to define and regulate blockchain configurations that blur the lines between open and permissioned environments. The FDIC plans to issue further guidance on specific digital asset use cases. Hill stated that the agency will continue to assess unresolved issues related to the scope of crypto-related activities, regulatory treatment of blockchain-based products, and risk management expectations for banks operating in this field. The broader goal is to create a consistent and transparent regulatory framework that promotes innovation while ensuring compliance with safety and soundness standards. Hill recently highlighted that the revised guidance represents a fundamental shift in the U.S. banking system's approach to crypto assets and blockchain technology. He emphasized that the FDIC has rescinded previous requirements for regulated institutions to notify the agency before engaging in digital asset and blockchain activities. Hill also addressed emerging issues surrounding stablecoins, particularly legislative developments in Congress. The FDIC is reviewing potential updates to pass-through deposit insurance regulations to clarify eligibility requirements for stablecoin reserve deposits. Key issues under evaluation include liquidity risk management, safeguards against illicit finance, and cybersecurity standards. The FDIC is considering whether to further clarify the boundaries of permissible activities in this area or expand regulatory guidance to cover more use cases. Hill stressed the need for clearer regulatory treatment of tokenized real-world assets and liabilities, including tokenized commercial bank deposits. He expressed concern about whether counterparties could use smart contracts to withdraw funds at face value after a bank failure, potentially increasing liquidation costs. These concerns are driving internal FDIC efforts to evaluate technical solutions to prevent unexpected fund outflows in bank resolution scenarios. Hill noted the challenge of aligning on-chain programmability with traditional regulatory safeguards designed to ensure the orderly liquidation of failed institutions. These changes mark the FDIC's formal move towards providing regulatory clarity for banks exploring digital asset infrastructure, while emphasizing the need for cautious risk controls and further clarification of permissible activities.