Financial technology firms and certain banks and bank holding companies can expect to face increased scrutiny as the Board of Governors of the Federal Reserve System takes another step to stem risks related to crypto-assets, use of blockchain technology, and complex fintech partnerships with nonbanks to deliver financial services to customers. Through its newly announced Novel Activities Supervision Program (“NAS Program”), the Federal Reserve will be taking a harder look at its supervised banking organizations, even those with less than $10 billion in assets, “to ensure that the risks associated with innovation are appropriately addressed” in four key areas:
- Complex bank–nonbank partnerships that offer banking to the public typically using technologies like application program interfaces that provide automated access to the bank’s infrastructure;
- Crypto-asset custody, crypto-collateralized lending, facilitation of cypto-asset trading, and stablecoin/dollar token activities;
- Use of blockchain technologies that could have a “significant impact” on the financial system; and
- Banking services provided to crypto-asset-related entities and fintech firms.
The announcement comes as the industry is still digesting and integrating the Interagency Guidance on Third-Party Relationships: Risk Management, a document the Federal Reserve is likely to follow closely as it takes a closer look at actors in these spaces. As a result, the broad swath of banks and fintechs that engage in these activities should give careful attention to the areas of focus outlined in the Interagency Guidance, including the following:
- Risk-based due diligence and ongoing monitoring;
- Enabling legal compliance through transparency;
- Securing and protecting shared data;
- Contingency planning, breach notification, and operational resilience;
- Effective complaint resolution processes to maintain fair customer treatment and access; and
- Compliance with anti-money laundering and sanctions requirements.
Banks and their fintech partners will need to work closely together and share information to guarantee both can withstand regulatory scrutiny. Banking organizations that are already engaging in any of the activities now labeled as “novel”—which is now defined broadly to encompass not only crypto-asset activities but many other technology, infrastructure, and service relationships—should be ready to accelerate their efforts to meet the standards laid out in the Interagency Guidance. As the Feds continue to increase scrutiny, learned guidance from experienced banking and fintech legal counsel has never been more important.
Please contact your Perkins Coie relationship attorney and/or the following:
