In response to multiple high-ranking officials being exposed for improper trading, the Federal Reserve will ban officials from holding individual stocks and cryptocurrencies starting in May.

Following the recent scandal involving several Federal Reserve officials engaging in improper trading, the relevant department has once again released new regulations. In addition to continuing the ban on senior officials holding individual stocks, bonds, and derivatives, cryptocurrencies have also been added to the list of prohibited assets. The new regulations will take effect on May 1, 2022.

The criticism faced by the Federal Reserve mostly stems from senior officials taking advantage of the stock market crisis during the COVID-19 pandemic to engage in insider trading, leading to the need for a second amendment since last year.

Prohibition on Holding Cryptocurrency

According to the ethical standards of Federal Reserve members and other senior officials, the Federal Reserve has prohibited relevant individuals from holding individual stocks, bonds, and derivatives since October of last year. They are only allowed to invest in diversified investment tools such as mutual funds, and must declare their trades 45 days in advance and hold them for at least a year.

The Federal Open Market Committee (FOMC) announced new rules on 2/18, as stated in their release:

Federal Reserve senior officials are prohibited from purchasing individual stocks, funds, bonds, institutional securities, futures, and foreign currencies. They must issue irrevocable securities trading notices 45 days before trading and hold them for over a year, even in times of significant financial market volatility.

Spouses and minor children of officials are also prohibited from engaging in related transactions, and both must divest related assets within 12 months after May 1, 2022. However, the complete document of the committee also mentions some exceptions:

• Shares of money market mutual funds based on government debt.
• Stocks, securities, and options obtained through a spouse's work.
• Defined benefit pension plans, defined contribution pension plans.
• Commodities held for non-investment purposes.
• Foreign currencies held for non-investment purposes.

In addition to the above exceptions, officials can still make related investments through mutual funds, but it appears that cryptocurrency is completely prohibited. However, non-custodial wallets currently do not require KYC, allowing officials to invest in cryptocurrencies through decentralized exchanges (DEX), DeFi, or even OTC.

Federal Reserve Vice Chair Resigns Due to Improper Trading

As previously reported, several senior Federal Reserve officials have resigned due to conflicts of interest in stock trading, including:

• Federal Reserve Vice Chair Richard Clarida
• Former President of the Federal Reserve Bank of Dallas, Robert Kaplan
• Former President of the Federal Reserve Bank of Boston, Eric Rosengren

Both Robert Kaplan and Eric Rosengren resigned at the end of September last year, and Federal Reserve Vice Chair Richard Clarida is the latest and third Federal Reserve official to be implicated in trading involving conflicts of interest.

Acting as Federal Reserve Vice Chair, Lael Brainard, a member of the Federal Reserve Board, is currently filling in for Richard Clarida. President Biden officially nominated former Deputy Treasury Secretary Sarah Bloom Raskin as the new Vice Chair in January.