According to the Fed, while cryptocurrencies may present "potential opportunities" for banks, firms must ensure they have systems in place to ensure the volatile assets do not jeopardize safety and soundness or consumer protections.
Banks should also notify the Fed before engaging in any crypto-related activities, and any banks that had already pursued crypto initiatives should also notify the Fed about their involvement in the digital asset space, the agency said.
The Fed also urged state member banks to notify their respective state regulators before engaging in crypto activities.
In the supervisory letter, the Fed stated that banks supervised by the agency should take several steps before engaging in any crypto-related activities, including determining whether existing laws required any specific filings and whether any activities under consideration were legally permissible.
Before getting involved in crypto, banks should have adequate risk management systems and controls in place to ensure that any endeavors were conducted in a safe and sound manner and were in compliance with relevant consumer protection statutes, according to the Fed.
The move comes just days after several Democratic senators led by Massachusetts Sen. Elizabeth Warren called on the U.S. Office of the Comptroller of the Currency (OCC) to rescind its previously issued guidance on crypto and replace it with "a comprehensive approach in coordination with other prudential regulators".
Last year, U.S. banking regulators, including the Fed and the OCC, stated that they planned to clarify in 2022 what types of crypto-related activities banks could engage in, including whether firms could hold digital assets on their balance sheets and facilitate crypto trades on behalf of customers.