The Federal Deposit Insurance Act (FDIA) generally prohibits insured state banks, but not uninsured state member banks, from acting as principal in activities that are not permissible for national banks. Relying on its authority under the FDIA to limit the activities of state member banks, on January 27, 2023, the Federal Reserve Board (Fed) issued a policy statement announcing that banks under its supervision, regardless of deposit insurance status, will be subject to the same limitations on activities, including novel banking activities such as those related to crypto-assets.

The policy provides that the Fed will permit state member banks (SMBs) to engage as principal only in those activities that are also permissible for national banks. The same terms, conditions, and limitations placed on national banks with respect to each activity will also apply to SMBs, regardless of deposit insurance status. However, a SMB may seek a deviation in regulatory treatment from the Fed by presenting a clear and compelling rationale for the deviation and by demonstrating robust risk management plans for the proposed activity.

Additionally, if the Office of the Comptroller of the Currency (OCC) has imposed limitations or conditions on an activity for a national bank, those limitations will similarly apply to SMBs. For example, if the OCC requires a national bank to receive a written nonobjection from OCC supervisory staff prior to engaging in an activity, a SMB would be required to receive a written nonobjection from Fed supervisory staff prior to engaging in that same activity.

In all instances, a SMB must conduct its activities apropos to safety and soundness measures and maintain internal controls and systems appropriate for the bank’s activities. The policy provides that with respect to novel activities, such as those involving crypto-assets or distributed ledger technology, it is of particular importance that SMBs have appropriate systems to “monitor and control risks, including liquidity, credit, market, operational, and compliance risks” and “to be able to explain and demonstrate an effective control environment related to such activities.”

Finally, the policy provides that SMBs would be prohibited from holding most crypto-assets as principal and that the Fed would expect a SMB to receive a supervisory nonobjection from Fed supervisors prior to engaging as principal in an activity that is conditionally permissible for national banks, such as issuing dollar tokens/stablecoins. The policy statement becomes effective upon publication in the Federal Register.