Michael Barr, the vice chair for supervision for the United States Federal Reserve, warned banks of the potential risks of crypto-related activities, suggesting crypto service providers be subject to similar regulations as traditional financial institutions. 

In written remarks prepared for an Oct. 12 speech at D.C. Fintech Week, Barr seemed to encourage banks to explore issuing tokens on distributed ledger networks, but “only in a controlled and limited manner.” The Fed vice chair for supervision suggested that financial institutions engage with U.S. regulators to ensure “safe, sound, and legally permissible” activities regarding the use cases of innovative technologies like crypto and stablecoins.

“The [Fed] is working with our colleagues at the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to ensure that crypto-asset-related activities banks may become involved in are well regulated and supervised, to protect both customers and the financial system,” said Barr. “Many of these activities pose novel risks, and it is important for banks to ensure that any crypto-asset-related activities they conduct are legally permissible and that banks have appropriate measures in place to manage those risks.”

Barr added that the Fed was “working with other regulatory agencies” on a framework for stablecoins, claiming they were more likely to “grow into money substitutes and become a viable means to pay for transactions” as opposed to crypto assets. His remarks followed many lawmakers and regulators proposing solutions to address stablecoins. Lawmakers have drafted legislation calling for a ban on algorithmic stablecoins, and Treasury Secretary Janet Yellen said in May that a "consistent federal framework” on stablecoins would be “highly appropriate.”

“Congress should take action to provide a strong federal framework for prudential oversight, and regulators must also use existing authorities,” said Barr.

Related: Basel Committee: Banks worldwide reportedly own 9.4 billion euros in crypto assets

U.S. Bank, one of the largest retail banks in the United States, announced in October 2021 that it launched a cryptocurrency custody service for institutional investors, one of the first major banks in the U.S. to do so. BNY Mellon followed in October 2022, announcing the launch of a digital custody platform for select clients’ Ether (ETH) and Bitcoin (BTC) holdings.