The US Federal Reserve has retracted a 2023 guidance that restricted how Fed-supervised banks, including those without insurance, interacted with crypto, as US regulators shift positively toward digital assets.
The 2023 guidance required uninsured banks to conform to the same regulations as federally insured institutions, based on the idea that similar activities present similar risks necessitating equivalent regulation.
This barred uninsured banks from participating in activities that were not allowed for national banks, such as crypto services, which automatically disqualified them from Fed membership since their primary operations were not permitted.
Fed remarks on financial system evolution since 2023
The Fed stated that a primary reason for retracting the guidance was its obsolescence and that “the financial system and the Board’s comprehension of innovative products and services have advanced.”
“Hence, the 2023 policy statement is no longer suitable and has been retracted,” it stated.
Caitlin Long, CEO of the crypto-focused Custodia Bank, commended the decision in an X post on Wednesday, noting that the 2023 guidance was the reason her institution’s application for a master account was previously rejected.
A master account with the Fed allows a financial institution to hold balances directly with the US central bank and access its essential payment systems, facilitating payment settlement in central bank money instead of depending on another bank as an intermediary.
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“The Fed broke the law by citing this specific guidance in the Custodia denial, even though the guidance hadn’t been made official yet, which occurred in February 2023,” Long remarked.
“But most of that team has now exited or lost power at the Fed. Nature is healing. Thank you VCS Bowman & Gov Waller!” she added.
New guidance to foster bank innovation
The move on Wednesday coincided with the Federal Reserve issuing new guidance to establish a formal route for both insured and uninsured Federal Reserve-supervised state member banks to pursue “innovative activities,” such as cryptocurrencies, provided that risk-management expectations are fulfilled, according to a statement released on Wednesday by the Fed.
Fed Vice Chair for Supervision Michelle Bowman stated that by “creating a pathway for responsible, innovative products and services, the Board is helping ensure that the banking sector remains safe and sound while also modern, efficient, and effective.”
Fed decision faced dissent
Fed Governor Michael Barr opposed the decision, arguing that the principle of equal treatment among banks is essential for maintaining a level playing field and preventing regulatory arbitrage.
“This principle remains valid today. Therefore, I cannot concur with rescinding the current policy statement and adopting a new one that would effectively promote regulatory arbitrage, undermine a level playing field, and create incentives misaligned with financial stability. I dissent,” he stated.
Barr has been accused of being linked to Operation Chokepoint 2.0, a federal initiative aimed at debanking crypto enterprises. However, he previously served as an adviser at Ripple and has advocated for responsible stablecoin regulation.
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