Fed Rescinds 2023 Guidance That Limited Banks’ Crypto Services

The US Fed has withdrawn a 2023 policy that limited how banks under its supervision could engage with cryptocurrencies.

The now-rescinded guidance applied to both insured and uninsured banks supervised by the Fed. Specifically, it required uninsured institutions to comply with the same restrictions imposed on federally insured banks, reflecting a regulatory principle that similar financial activities should be subject to the same standards.

In practice, however, the policy had far-reaching consequences. Because national banks were prohibited from offering certain crypto-related services, uninsured banks were bound by similar limitations. This left some institutions unable to provide digital asset services altogether.

As a result, banks whose core business involved crypto activities were deemed ineligible for Federal Reserve membership, cutting them off from key central banking services.

Why the Federal Reserve Reversed Course

The Federal Reserve said conditions have changed since the guidance was introduced. In an official statement released Wednesday, the central bank stated that the financial system and its understanding of innovation have changed over time.

Given these developments, the Board concluded that the 2023 framework no longer reflected current realities and was no longer appropriate.

Custodia Bank Welcomes the Move

The reversal drew swift responses from affected institutions. Caitlin Long, chief executive of Custodia Bank, publicly welcomed the decision.

In a post on X (formerly Twitter), Long said the guidance played a central role in the Fed’s rejection of Custodia’s application for a master account. She noted that the policy was cited even before it formally took effect in February 2023, a factor she said contributed to the bank’s denial.

For the uninitiated, a Federal Reserve master account allows banks to hold funds directly with the central bank. Moreover, it provides access to core payment systems without relying on intermediary institutions.

Long also noted that several officials involved in the earlier decision no longer hold the same influence. Specifically, she thanked Vice Chair Michelle Bowman and Governor Christopher Waller for their roles in the policy shift.

A New Framework for Bank Innovation

Alongside withdrawing the old guidance, the Fed introduced a new supervisory framework for bank innovation. The updated guidance applies to both insured and uninsured Fed-supervised state member banks. 

Under the new framework, banks may pursue innovative activities, including crypto-related services, provided they meet established risk management standards. The Fed stressed that innovation must remain consistent with safety and soundness standards.

Vice Chair for Supervision Michelle Bowman endorsed the updated approach, stating that it enables banks to adopt modern services without compromising financial stability. She added that responsible innovation can improve efficiency across the banking sector.

Internal Dissent at the Fed

Despite the policy shift, consensus was not universal. Federal Reserve Governor Michael Barr dissented from the decision.

Barr argued that treating banks equally helps prevent regulatory loopholes. He warned that rolling back the guidance could encourage regulatory arbitrage.

In his dissent, Barr said the change could weaken fair competition. He also expressed concern about potential risks to financial stability.

Barr has previously drawn criticism over alleged efforts to limit banking access for crypto firms. Those claims are often referred to as “Operation Chokepoint 2.0.” 

At the same time, Barr has professional ties to the crypto industry. He has previously advised Ripple and has expressed support for the development of structured regulation for stablecoins.