In a bid to curb risks associated with the burgeoning world of cryptocurrencies, the Federal Reserve has announced a robust oversight program targeting banks’ interactions with digital assets and blockchain technology. This move marks the latest regulatory effort by US authorities to restrain financial institutions’ foray into the cryptocurrency realm, Bloomberg reported.

The central bank’s newly unveiled initiative aims to fortify the supervision of activities tied to digital assets, extending its watchful eye over lenders engaged in this evolving space. Throughout the past year, regulatory bodies including the Federal Reserve have issued several cautionary advisories, underscoring the potential hazards associated with cryptocurrencies.

The collaboration between banks and non-lender organizations, including fintech companies, that enable cryptocurrency-related services for users, is of grave concern. The novel activities supervision program of the Federal Reserve is created to take advantage of financial innovation’s benefits while judiciously managing risks to protect the stability of the banking system, the Fed stated.

Previously, the Federal Reserve, alongside the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, highlighted apprehensions regarding the volatile nature of cryptocurrencies. Mitigating the migration of uncontrollable risks into the banking sector remains a priority.

This regulatory stance has elicited opposition from crypto proponents who view the policies as unfavorable to the asset class. Notably, a recent denial of a crypto firm’s application to join the Federal Reserve system underscored the regulators’ cautious approach.

“The fear is that engagement with such volatile assets could put the traditional banking sector at risk,” warned Howard Fischer, a partner at the New York-based law firm Moses Singer. Fischer asserted that unless the digital asset space faces regulation similar to traditional financial institutions, apprehensions are unlikely to dissipate.

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Fed Continues Efforts To Bring Crypto Regulations

As the Federal Reserve takes proactive steps to address the evolving crypto landscape, the implications for traditional banking and the broader financial ecosystem remain subjects of intense scrutiny and ongoing dialogue.

In addition, the Federal Reserve mandated that state-chartered banks get permission before taking part in stablecoin activities that facilitate payments. This decision might have an impact on lenders in jurisdictions that are still overseen by the central bank but are thought to be crypto-friendly.

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