[Federal Register Volume 88, Number 25 (Tuesday, February 7, 2023)]
[Rules and Regulations]
[Pages 7848-7851]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-02192]


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FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Docket No. R-1800]
RIN 7100-AG-53


Policy Statement on Section 9(13) of the Federal Reserve Act

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Final rule.

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SUMMARY: The Board is issuing a policy statement interpreting section 
9(13) of the Federal Reserve Act and setting out a rebuttable 
presumption that it will exercise its discretion under that provision 
to limit state member banks to engaging as principal in only those 
activities that are permissible for national banks--in each case, 
subject to the terms, conditions, and limitations placed on national 
banks with respect to the activity--unless those activities are 
permissible for state banks by federal statute or under part 362 of the 
Federal Deposit Insurance Corporation's regulations. The policy 
statement also reiterates to state member banks that legal 
permissibility is a necessary, but not sufficient, condition to 
establish that a state member bank may engage in a particular activity. 
A state member bank must at all times conduct its business and exercise 
its powers with due regard to safety and soundness. For instance, it 
should have in place internal controls and information systems that are 
appropriate and adequate in light of the nature, scope, and risks of 
its activities. The Supplementary Information section provides examples 
of how the policy statement would be applied to certain crypto-asset-
related activities.

DATES: This policy statement is effective on February 7, 2023.

FOR FURTHER INFORMATION CONTACT: Asad Kudiya, Assistant General 
Counsel, (202) 475-6358; Andrew Hartlage, Special Counsel, (202) 452-
6483; Kelley O'Mara, Senior Counsel, (202) 973-7497; or Katherine Di 
Lucido, Attorney, (202) 452-2352, Legal Division; Kavita Jain, Deputy 
Associate Director, (202) 452-2062, Division of Supervision and 
Regulation, Board of Governors of the Federal Reserve System, 20th 
Street and C Streets NW, Washington, DC 20551. For users of TTY-TRS, 
please call 711 from any telephone, anywhere in the United States.

SUPPLEMENTARY INFORMATION: 

I. Background

    In recent years, the Board has received a number of inquiries, 
notifications, and proposals from state member banks and applicants for 
membership regarding potential engagement in novel and unprecedented 
activities.\1\ For example, the Board has received inquiries from banks 
regarding potentially engaging in certain activities involving crypto-
assets.\2\ In January 2023, the Federal Deposit Insurance Corporation 
(FDIC), the Office of the Comptroller of the Currency (OCC), and the 
Board issued a statement highlighting significant risks associated with 
crypto-assets and the crypto-asset sector that banking organizations 
should be aware of, including significant volatility in crypto-asset 
markets, risks of fraud among crypto-asset sector participants, legal 
uncertainties, and heightened risks associated with open, public, and/
or decentralized networks.\3\ As part of its careful review of 
proposals from banking organizations to engage in activities involving 
crypto-assets, and in light of these risks, the Board is clarifying its 
interpretation of section 9(13) of the Federal Reserve Act (Act) and 
setting out a rebuttable presumption for how it will exercise its 
authority under that statutory provision. This Supplementary 
Information also provides examples of how the Board intends to apply 
this presumption in the context of certain crypto-asset-related 
activities.
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    \1\ See SR Letter 22-6, CA Letter 22-6: Engagement in Crypto-
Asset-Related Activities by Federal Reserve-Supervised Banking 
Organizations (August 16, 2022) (providing guidance to banking 
organizations engaging or seeking to engage in crypto-asset-related 
activities).
    \2\ Throughout this Supplementary Information, the term 
``crypto-assets'' refers to digital assets issued using distributed 
ledger technology and cryptographic techniques (for example, bitcoin 
and ether), but does not include such assets to the extent they are 
more appropriately categorized within a recognized, traditional 
asset class (for example, securities with an effective registration 
statement filed under the Securities Act of 1933 that are issued, 
stored, or transferred through the system of a regulated clearing 
agency and in compliance with all applicable federal and state 
securities laws). To the extent transmission using distributed 
ledger technology and cryptographic techniques changes the risks of 
a traditional asset (for example, through issuance, storage, or 
transmission on an open, public, and/or decentralized network, or 
similar system), the Board reserves the right to treat it as a 
``crypto-asset.''
    \3\ Board, FDIC, and OCC, Joint Statement on Crypto-Asset Risks 
to Banking Organizations, at 1 (January 3, 2023) (Joint Statement). 
In the Joint Statement, ``crypto-assets'' refers ``generally to any 
digital asset implemented using cryptographic techniques.'' The 
Board believes that these risks similarly apply to crypto-assets as 
defined in this Supplementary Information. See supra note 2.
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    As expressed in the policy statement, the Board generally believes 
that the same bank activity, presenting the same risks, should be 
subject to the same regulatory framework, regardless of which agency 
supervises the bank. This principle of equal treatment helps to level 
the competitive playing field among banks with different charters and 
different federal supervisors, and to mitigate the risks of regulatory 
arbitrage.
    In alignment with this principle, the Board generally presumes that 
it will exercise its discretion under section 9(13) of the Act to limit 
state member

[[Page 7849]]

banks to engaging as principal in only those activities that are 
permissible for national banks--in each case, subject to the terms, 
conditions, and limitations placed on national banks with respect to 
the activity--unless those activities are permissible for state banks 
by federal statute or under part 362 of the FDIC's regulations. The 
Board also reiterates to state member banks that legal permissibility 
is a necessary, but not sufficient, condition to establish that a state 
member bank may engage in a particular activity. A state member bank 
must at all times conduct its business and exercise its powers with due 
regard to safety and soundness.\4\ For instance, it should have in 
place internal controls and information systems that are appropriate in 
light of the nature, scope, and risks of its activities.\5\
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    \4\ 12 CFR 208.3(d)(1).
    \5\ 12 CFR 208, app. D-1.
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A. Legal Authority

    Under section 9(13) of the Act, the Board ``may limit the 
activities'' of a state member bank and its subsidiaries to those 
activities that are permissible for a national bank in a manner 
consistent with section 24 of the Federal Deposit Insurance Act 
(FDIA).\6\ Section 24 of the FDIA generally prohibits insured state 
banks from engaging as principal in any activity that is not 
permissible for national banks, unless authorized by federal statute or 
the FDIC.\7\
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    \6\ 12 U.S.C. 330 (as amended by Federal Deposit Insurance 
Corporation Improvement Act of 1991 Sec.  303(b), Public Law 102-
242, 105 Stat. 2236, 2353).
    \7\ 12 U.S.C. 1831a(a); 12 CFR part 362.
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    The National Bank Act enumerates certain powers that national banks 
may exercise and authorizes national banks to exercise ``all such 
incidental powers as shall be necessary to carry on the business of 
banking.'' \8\ The OCC has the authority to interpret provisions of the 
National Bank Act and is charged with the ``discretion to authorize 
activities beyond those specifically enumerated,'' within reasonable 
bounds.\9\ Section 7.1000 of the OCC's regulations identifies the 
criteria that the OCC uses to determine whether an activity is 
authorized as part of, or incidental to, the business of banking under 
12 U.S.C. 24(Seventh).\10\ If a national bank has not been authorized 
by federal law, including the National Bank Act, to engage in an 
activity, then national banks are not permitted to engage in such 
activity.
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    \8\ 12 U.S.C. 24(Seventh).
    \9\ NationsBank of North Carolina, N.A. v. Variable Annuity Life 
Ins. Co., 513 U.S. 251, 258 n.2 (1995).
    \10\ 12 CFR 7.1000.
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B. Application

    This policy statement applies to insured and uninsured state member 
banks. The statement does not impact the legal obligation of insured 
state member banks to seek approval from the FDIC when required under 
section 24 of the FDIA and part 362 of the FDIC's regulations. As 
established under those provisions, insured state banks may not engage 
as principal in any type of activity that is not permissible for a 
national bank unless--(i) the FDIC has determined that the activity 
would pose no significant risk to the Deposit Insurance Fund; and (ii) 
the state bank is, and continues to be, in compliance with applicable 
capital standards.\11\
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    \11\ 12 U.S.C. 1831a(a)(1).
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    By issuing this statement, the Board is setting out a clear 
expectation that state member banks look to federal statutes, OCC 
regulations, and OCC interpretations to determine whether an activity 
is permissible for national banks. If no such source authorizes 
national banks to engage in the activity, then state member banks 
should look to whether there is authority for state banks to engage in 
the activity under federal statute or part 362 of the FDIC's 
regulations. If there also is no authority for a state bank to engage 
in the activity under federal statute or part 362 of the FDIC's 
regulations, a state member bank may not engage in the activity unless 
it has received the permission of the Board under Sec.  208.3(d)(2) of 
the Board's Regulation H. Under that provision, a state member bank may 
not, without the permission of the Board, change the general character 
of its business or the scope of the corporate powers it exercised at 
the time of its admission to membership. In such instances, insured 
state banks would be required to submit an application to the FDIC 
under part 362 of the FDIC's regulations.
    In determining whether to grant a state member bank permission to 
engage in an activity under Sec.  208.3(d)(2) of Regulation H, the 
Board, consistent with the policy statement, will rebuttably presume 
that a state member bank is prohibited from engaging as principal in 
any activity that is impermissible for national banks, unless the 
activity is permissible for state banks under federal statute or part 
362 of the FDIC's regulations. This presumption may be rebutted if 
there is a clear and compelling rationale for the Board to allow the 
proposed deviation in regulatory treatment among federally supervised 
banks, and the state member bank has robust plans for managing the 
risks of the proposed activity in accordance with principles of safe 
and sound banking.
    In assessing permissibility, the Board is intending to align its 
process with that of the FDIC under section 24 of the FDIA.\12\ If the 
FDIC, by rule, permits insured state banks to engage in the activity, 
no Board approval would be required to establish permissibility.\13\ 
However, if the FDIC permits the activity only for a particular bank, 
separate Board approval would be required for all other state member 
banks.
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    \12\ See, e.g., FDIC FIL-54-2014: Filing and Documentation 
Procedures for State Banks Engaging, Directly or Indirectly, in 
Activities or Investments that are Permissible for National Banks 
(November 19, 2014).
    \13\ As noted below, legal permissibility is a necessary, but 
not sufficient, condition to establish that a state member bank may 
engage in a particular activity. Regardless of the legal 
permissibility of a proposed activity, if commencing the proposed 
activity would constitute a change in the general character of the 
state member bank's business or in the scope of corporate powers it 
exercised at the time of its admission to membership, prior 
permission of the Federal Reserve pursuant to Sec.  208.3(d)(2) of 
Regulation H would be required.
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    In a case where a state member bank determines that an activity is 
permissible for national banks under federal statute, OCC regulations, 
or OCC interpretation, the bank may only engage in the activity if the 
bank adheres to the terms, conditions, and limitations placed on 
national banks by the OCC with respect to the activity. For example, if 
the OCC conditions permissibility on a national bank demonstrating, to 
the satisfaction of its supervisory office, that the bank has controls 
in place to conduct the activity in a safe and sound manner, and 
receiving a written nonobjection from OCC supervisory staff before 
engaging in a particular activity, then the activity would not be 
permissible for a state member bank unless the bank makes the same 
demonstration and receives a written nonobjection from Federal Reserve 
supervisory staff before commencing such activity.

C. Safety and Soundness

    In the statement, the Board also reiterates to state member banks 
that legal permissibility is a necessary, but not sufficient, condition 
to establish that a state member bank may engage in a particular 
activity. A state member bank must at all times conduct its business 
and exercise its powers with due regard to safety and soundness.\14\ 
For instance, it should have in place internal controls and information 
systems that are appropriate to the nature, scope, and

[[Page 7850]]

risks of its activities.\15\ Further, a state member bank must comply 
at all times with Regulation H, conditions of membership prescribed by 
the Board,\16\ and other applicable laws and regulations, including 
those related to consumer compliance and anti-money laundering. With 
respect to any novel and unprecedented activities, such as those 
associated with crypto-assets or use of distributed ledger technology, 
it is particularly important for a state member bank to have in place 
appropriate systems to monitor and control risks, including liquidity, 
credit, market, operational (including cybersecurity and use of third 
parties), and compliance risks (including compliance with Bank Secrecy 
Act and Office of Foreign Asset Control requirements to reduce the risk 
of illicit financial activity). Federal Reserve supervisors will expect 
state member banks to be able to explain and demonstrate an effective 
control environment related to such activities.
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    \14\ 12 CFR 208.3(d)(1).
    \15\ 12 CFR 208, app. D-1.
    \16\ 12 CFR 208.3(d)(3).
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D. Specific Activities of Interest

    The Board has received inquiries as to the permissibility of 
certain crypto-asset-related activities for state member banks. Below, 
the Board discusses how it would presumptively apply section 9(13) of 
the Act to these activities. In practice, this presumption could be 
rebutted if there is a clear and compelling rationale for the Board to 
allow deviations in regulatory treatment among federally supervised 
banks, and the state member bank has robust plans for managing the 
risks of such activities in accordance with principles of safe and 
sound banking. However, the Board has not yet been presented with facts 
and circumstances that would warrant rebutting its presumption. Nothing 
in the policy statement would prohibit a state member bank, or an 
applicant to become a state member bank, once approved, from providing 
safekeeping services for crypto-assets in a custodial capacity if such 
activities are conducted in a safe and sound manner and in compliance 
with consumer, anti-money-laundering, and anti-terrorist-financing 
laws.
    Holding Crypto-Assets as Principal. The Board has not identified 
any authority permitting national banks to hold most crypto-assets, 
including bitcoin and ether, as principal in any amount,\17\ and there 
is no federal statute or rule expressly permitting state banks to hold 
crypto-assets as principal. Therefore, the Board would presumptively 
prohibit state member banks from engaging in such activity under 
section 9(13) of the Act.\18\
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    \17\ To date, the OCC has not made a determination addressing 
the permissibility of a national bank holding crypto-assets as 
principal, other than ``stablecoins'' to facilitate payments subject 
to the conditions of OCC Interpretive Letter 1179. See OCC 
Interpretive Letter No. 1174 (January 4, 2021) (Interpretive Letter 
1174); OCC Interpretive Letter No. 1179 (November 18, 2021) 
(Interpretive Letter 1179). The OCC has required a national bank to 
divest crypto-assets held as principal that it acquired through a 
merger with a state bank. Specifically, the OCC conditioned its 
recent approval of the merger between Flagstar Bank, FSB and New 
York Community Bank into Flagstar Bank, NA on the divestiture of 
holdings of ``Hash,'' a crypto-asset, after a conformance period, as 
well as a commitment not to increase holdings of any crypto-related 
asset or token ``unless and until the OCC determines that . . . Hash 
or other crypto-related holdings are permissible for a national 
bank.'' OCC Conditional Approval Letter No. 1299, at 9 (October 27, 
2022).
    \18\ In addition, insured state member banks would need to seek 
approval to hold crypto-assets, other than those permitted by OCC 
Interpretive Letters 1174 and 1179, from the FDIC under section 24 
of the FDIA and part 362 of the FDIC's regulations.
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    The Board believes this presumption is bolstered by safety and 
soundness concerns.\19\ The Financial Stability Oversight Council has 
observed that, in the absence of a fundamental economic use case, the 
value of most crypto-assets is driven largely by sentiment and future 
expectations, and not by cash flows from providing goods or services 
outside the crypto-asset ecosystem.\20\ This prevents firms that hold 
crypto-assets from engaging in prudent risk management based on the 
underlying value of most crypto-assets, their anticipated discounted 
cash flows, or the historic behavior of the relevant markets. Moreover, 
the crypto-asset sector--which is globally dispersed--is largely 
unregulated or noncompliant with regulation from a market-conduct 
perspective, and issuers are often not subject to or not compliant with 
disclosure and accounting requirements. This opacity may make it 
difficult or impossible to assess market and counterparty exposure 
risks. Further, engagement in crypto-asset transactions can present 
significant illicit finance risks, in part due to the pseudonymity of 
transactors and validators. Finally, crypto-assets that are issued or 
transacted on open, public, and/or decentralized ledgers may involve 
significant cybersecurity risks--especially in comparison to 
traditional asset classes.
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    \19\ See Joint Statement (noting that holding as principal 
crypto-assets that are issued, stored, or transferred on an open, 
public and/or decentralized network, or similar system, is highly 
likely to be inconsistent with safe and sound banking practices).
    \20\ Financial Stability Oversight Council, Report on Digital 
Asset Financial Stability Risks and Regulation, at 27 (October 3, 
2022); see also id., at 23-28.
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    Issuing Dollar Tokens. Certain state member banks have proposed to 
issue dollar-denominated tokens (dollar tokens) using distributed 
ledger technology or similar technologies. The permissibility of the 
issuance of dollar tokens to facilitate payments for national banks is 
subject to OCC Interpretive Letters 1174 and 1179, including the 
conditions set out therein.\21\ A state member bank seeking to issue a 
dollar token would be required to adhere to all the conditions the OCC 
has placed on national banks with respect to such activity, including 
demonstrating, to the satisfaction of Federal Reserve supervisors, that 
the bank has controls in place to conduct the activity in a safe and 
sound manner, and receiving a supervisory nonobjection before 
commencing such activity.
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    \21\ Interpretive Letter 1174; Interpretive Letter 1179.
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    The Board generally believes that issuing tokens on open, public, 
and/or decentralized networks, or similar systems is highly likely to 
be inconsistent with safe and sound banking practices.\22\ The Board 
believes such tokens raise concerns related to operational, 
cybersecurity, and run risks, and may also present significant illicit 
finance risks, because--depending on their design--such tokens could 
circulate continuously, quickly, pseudonymously, and indefinitely among 
parties unknown to the issuing bank. Importantly, the Board believes 
such risks are pronounced where the issuing bank does not have the 
capability to obtain and verify the identity of all transacting 
parties, including for those using unhosted wallets.\23\
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    \22\ See Joint Statement, at 2.
    \23\ Interpretive Letter 1174, at 4 (quoting President's Working 
Group on Financial Markets, Statement on Key Regulatory and 
Supervisory Issues Relevant to Certain Stablecoins, at 3 (December 
23, 2020)).
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List of Subjects in 12 CFR Part 208

    Accounting; Agriculture; Banks, Banking; Confidential business 
information; Consumer protection; Crime; Currency; Federal Reserve 
System; Flood insurance; Insurance; Investments; Mortgages; Reporting 
and recordkeeping requirements; Securities.

12 CFR Chapter II

Authority and Issuance

    For the reasons set forth in the Supplementary Information, part 
208 of chapter II of title 12 of the Code of

[[Page 7851]]

Federal Regulations is amended as follows:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

0
1. The authority citation for part 208 continues to read as follows:

    Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 
371d, 461, 481-486, 601, 611, 1814, 1816, 1817(a)(3), 1817(a)(12), 
1818, 1820(d)(9), 1833(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 
1831w, 1831x, 1835a, 1882, 2901-2907, 3105, 3310, 3331-3351, 3905-
3909, 5371, and 5371 note; 15 U.S.C. 78b, 78I(b), 78l(i), 780-
4(c)(5), 78q, 78q-1, 78w, 1681s, 1681w, 6801, and 6805; 31 U.S.C. 
5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.

Subpart J--Interpretations

0
2. Add Sec.  208.112 to read as follows:


Sec.  208.112  Policy statement on section 9(13) of the Federal Reserve 
Act.

    (a) Under section 9(13) of the Federal Reserve Act (12 U.S.C. 330), 
a state member bank may ``exercise all corporate powers granted it by 
the State in which it was created . . . except that the [Board] may 
limit the activities of State member banks and subsidiaries of State 
member banks in a manner consistent with section 24 of the Federal 
Deposit Insurance Act.'' The Board interprets this provision as vesting 
the Board with the authority to prohibit or otherwise restrict state 
member banks and their subsidiaries from engaging as principal in any 
activity (including acquiring or retaining any investment) that is not 
permissible for a national bank, unless the activity is permissible for 
state banks by federal statute or under part 362 of the Federal Deposit 
Insurance Corporation's (FDIC) regulations, 12 CFR part 362. The Board 
reminds state member banks of the fundamental canon of federal banking 
law that activities are permissible for a national bank only if 
authority is provided under federal law, including the National Bank 
Act.
    (b) The Board generally believes that the same bank activity, 
presenting the same risks, should be subject to the same regulatory 
framework, regardless of which agency supervises the bank. This 
principle of equal treatment helps to level the competitive playing 
field among banks with different charters and different federal 
supervisors and to mitigate the risks of regulatory arbitrage.
    (c) In alignment with this principle, the Board generally presumes 
that it will exercise its discretion under section 9(13) of the Federal 
Reserve Act (12 U.S.C. 330) to limit state member banks and their 
subsidiaries to engaging as principal in only those activities that are 
permissible for national banks--in each case, subject to the terms, 
conditions, and limitations placed on national banks with respect to 
the activity--unless those activities are permissible for state banks 
by federal statute or under 12 CFR part 362. For example, if the OCC 
conditions permissibility on a national bank demonstrating, to the 
satisfaction of its supervisory office, that the bank has controls in 
place to conduct the activity in a safe and sound manner, and receiving 
a written nonobjection from OCC supervisory staff before engaging in a 
particular activity, then the activity would not be permissible for a 
state member bank unless the bank makes the same demonstration and 
receives a written nonobjection from Federal Reserve supervisory staff 
before commencing such activity.
    (d) If a state member bank or its subsidiary proposes to engage in 
an activity as principal that is not permissible for a national bank or 
for an insured state member bank under federal statute or part 362 of 
this title, the state member bank or subsidiary may not engage in the 
activity unless the bank has received the prior permission of the Board 
under Sec.  208.3(d)(2). Under that provision, a state member bank may 
not, without the permission of the Board, change the general character 
of its business or the scope of the corporate powers it exercises at 
the time of its admission. In determining whether to grant permission 
to engage in an activity under Sec.  208.3(d)(2), the Board will 
rebuttably presume that a state member bank and its subsidiaries are 
prohibited from engaging as principal in any activity that is 
impermissible for national banks, unless the activity is permissible 
for state banks under federal statute or part 362 of this title. This 
presumption may be rebutted if there is a clear and compelling 
rationale for the Board to allow the proposed deviation in regulatory 
treatment among federally supervised banks, and the state member bank 
has robust plans for managing the risks of the proposed activity in 
accordance with principles of safe and sound banking. Depending on the 
applicant and the activity, an application to the FDIC may also be 
required under section 24 of the Federal Deposit Insurance Act (12 
U.S.C. 1831a).
    (e) This statement does not impact the legal obligation of insured 
state member banks to seek approval from the FDIC when required under 
section 24 of the Federal Deposit Insurance Act and part 362 of this 
title. As established under those provisions, insured state banks may 
not engage as principal in any type of activity that is not permissible 
for a national bank unless--(1) the FDIC has determined that the 
activity would pose no significant risk to the Deposit Insurance Fund; 
and (2) the state bank is, and continues to be, in compliance with 
applicable capital standards.
    (f) The Board also reiterates to state member banks that legal 
permissibility is a necessary, but not sufficient, condition to 
establish that a state member bank may engage in a particular activity. 
Under Sec.  208.3(d)(1), a state member bank must at all times conduct 
its business and exercise its powers with due regard to safety and 
soundness. Under appendix D-1 of this part, at a minimum, a state 
member bank should have in place and implement internal controls and 
information systems that are appropriate for the nature, scope, and 
risks of its activities. Further, under Sec.  208.3(d)(3), a state 
member bank must comply at all times with this part and conditions of 
membership prescribed by the Board; in addition, a state member bank 
must comply with other applicable laws and regulations, including those 
related to consumer compliance and anti-money laundering. With respect 
to any novel and unprecedented activities, appropriate systems to 
monitor and control risks, including liquidity, credit, market, 
operational, and compliance risks, are particularly important; Federal 
Reserve supervisors will expect banks to be able to explain and 
demonstrate an effective control environment related to such 
activities.

    By order of the Board of Governors of the Federal Reserve 
System, January 27, 2023.
Ann E. Misback,
Secretary of the Board.
[FR Doc. 2023-02192 Filed 2-6-23; 8:45 am]
BILLING CODE 6210-01-P