According to a recent supervisory letter, state banks that are part of the US Federal Reserve system must secure written supervisory nonobjection from the Fed before engaging in any activities involving dollar tokens used in facilitating payments, such as stablecoins, a type of digital currency usually linked to a conventional asset, typically the US dollar.

The Federal Reserve has announced the formation of a new supervisory program aimed at overseeing the activities of banks it supervises that are related to cryptocurrency, blockchain technology and nonbank partnerships driven by technology. This program is designed to supplement the existing supervisory process and enhance oversight.

Banks seeking approval to participate in stablecoin activities must demonstrate effective risk management practices, which include the ability to identify and monitor potential risks such as cybersecurity and illicit finance threats. The Fed requires banks to receive written non-objection before engaging in such activities. Even after receiving non-objection, member banks involved in dollar token-related activities will continue to be monitored closely, and their activities will remain subject to supervisory review, including heightened monitoring.

The announcement comes against the backdrop of Paypal announcing the launch of its own stablecoin.