The Federal Reserve asserts it has retracted its former guidance concerning crypto because it was deemed obsolete, and its comprehension has advanced.
The US Federal Reserve has rescinded a 2023 guidance that restricted how Fed-supervised banks, including uninsured entities, interacted with crypto, as US regulators persist in turning favorably toward digital assets.
The 2023 guidance mandated uninsured banks to abide by the same rules as federally insured institutions, grounded upon the principle that similar activities present similar risks and must face identical oversight.
This precluded uninsured banks from pursuing ventures that were disallowed for national banks, such as crypto services, which automatically invalidated Fed membership because the institution’s primary activities were prohibited.
Fed Says Financial System Has Changed Since 2023
The Fed cited a primary justification for rescinding the guidance: it was considered obsolete, and “the financial system and the Board’s comprehension of innovative products and services have progressed.”
“As a result, the 2023 policy statement is no longer appropriate and has been withdrawn,”
it said.
Caitlin Long, the CEO of the crypto-focused Custodia Bank, commended the move in an X post on Wednesday, clarifying that the 2023 guidance was the factor why her institution’s application for a master account had previously been rejected.
A master account with the Fed allows a financial institution to maintain funds directly with the US central bank and utilize its core payment systems, thereby permitting payment settlement in central bank money instead of depending on another bank as an intermediary.
“The Fed broke the law by citing this very guidance in the Custodia denial, even tho the guidance hadn’t become official yet, that didn’t happen until Feb 2023,”
Long said.
“But most of that team is now gone or out of power at the Fed. Nature is healing. Thank you VCS Bowman & Gov Waller!”
she added.
New Guidance Aims to Encourage Bank Innovation
The action on Wednesday transpired as the Federal Reserve issued updated directives to establish a formal route for both insured and uninsured Federal Reserve-supervised state member banks to undertake “innovative activities,” such as cryptocurrencies, given risk-management expectations are satisfied, as stipulated in a statement on Wednesday by the Fed.
Michelle Bowman, Fed Vice Chair for Supervision, stated that by “establishing a trajectory for responsible, innovative products and services, the Board is assisting in guaranteeing that the banking sector persists as safe and sound while also being modern, efficient, and effective.”
Federal Reserve Decision Fell Short of Unanimity
Fed Governor Michael Barr objected to the decision, contending that the principle of equal treatment among banks facilitates the maintenance of a fair competitive environment and thwarts regulatory arbitrage.
“This principle continues to hold true today. Therefore, I cannot agree to rescind the current policy statement and adopt a new one that would, in effect, encourage regulatory arbitrage, undermine a level playing field, and promote incentives misaligned with maintaining financial stability. I dissent,”
he said.
Barr has faced accusations of association with Operation Chokepoint 2.0, a federal effort to disengage crypto companies from banking. Nonetheless, he was formerly an adviser at Ripple and has advocated for judicious stablecoin oversight.
