Federal Reserve Rescinds Policy That Curbed Crypto Activity at State Member Banks

Highlights:

• Banks have gained a clearer crypto path after the Federal Reserve rescinded a policy that blocked uninsured access.
• Uninsured banks can now apply for crypto services through a risk-based review under new Fed guidance rules.
• Fed shift replaces blanket crypto limits with supervision that focuses on risk controls and bank stability goals.

The Federal Reserve has withdrawn a 2023 policy that restricted crypto-related activities at state member banks. The decision affects banks under Federal Reserve supervision, including uninsured institutions. Previously, the policy forced uninsured banks to follow the same rules as insured banks. As a result, many banks avoided crypto services to protect their Federal Reserve membership. Therefore, the guidance shaped how banks approached digital assets.

The Federal Reserve said the policy no longer reflected current market conditions. Officials explained that their understanding of innovative financial services has improved over time. Consequently, the Board decided the framework no longer served its original purpose. The policy created a strong presumption against novel activities. Practically, this prevented crypto custody and associated services.

In addition, the policy influenced access to the Federal Reserve infrastructure. Banks with limited operations did not qualify to be members of the Fed. Banks were deprived of immediate access to payment and settlement systems without membership. This restriction had an impact on risk decisions in the banking industry. The withdrawal is now an indicator of a change in supervisory thinking.

Federal Reserve Rescinds Policy and Sets New Rules for Bank Innovation

In addition to the withdrawal, the Federal Reserve also provided new guidance to innovative banking operations. The new framework establishes a formal application pathway for digital asset services. Both insured and uninsured state member banks can apply under the revised rules. However, banks must meet defined risk management standards. The Fed said safety and soundness remain central to supervision.

Under the new system, insured banks are still subject to limits under federal deposit law. In the meantime, uninsured banks can seek authorization to proceed with activities that insured counterparts cannot perform. The Federal Reserve will address such requests on a case-by-case basis. The supervisors will assess the liquidity strength, governance, and resolution planning.

Fed Vice Chair of Supervision Michelle Bowman defended the updated guidance. According to her, new technologies have the potential to enhance efficiency and services to customers. She also mentioned that clear rules enable banks to be responsibly innovative.

Dissent Raises Concerns About Fair Bank Rules

The Federal Reserve Board did not vote unanimously on the decision. Governor Michael Barr did not agree with the withdrawal of the policy. He cautioned that imbalanced treatment might promote regulatory arbitrage. According to Barr, uniform rules can be used to preserve healthy competition among the banks. He claimed that equality of standards is favourable to financial stability.

Barr also pointed out that the policy was unanimously approved at adoption. He claimed that the principle of regulation that underlies it is still applicable today. Barr argued that similarly risky activities ought to be subject to similar controls. The Board proceeded with the revised framework despite his objections. The ruling indicates a divergence in sentiment among the central bank in terms of regulations.

In the meantime, the policy change was welcomed by crypto-oriented Custodia Bank. Chief executive Caitlin Long announced that the guidance impacted the master account application at Custodia. A master account grants immediate access to Federal Reserve payment systems. Custodia is an uninsured bank that is fully backed by reserves. With the new framework, it is now able to obtain permission to engage in activities that were initially limited.