The Fed's Gatekeeping Power Over Crypto Banking and Its Implications for Financial Inclusion and Systemic Risk

The integration of crypto assets into traditional financial infrastructure has become a defining regulatory challenge of the 2020s. While the Federal Reserve has historically played a secondary role in crypto banking oversight compared to agencies like the OCC, FDIC, and SEC, its influence remains critical through its role in shaping systemic risk frameworks and interagency coordination. Recent regulatory shifts-from the OCC's expanded crypto permissions to the SEC's nuanced approach-highlight a broader tension: how to balance innovation with financial stability and inclusion.

The Fed's Evolving Role in Crypto Banking

The Federal Reserve's direct regulatory authority over crypto banking is limited, as it primarily oversees monetary policy and systemic risk. However, its indirect influence is significant. In July 2025, the Fed joined the OCC and FDIC in issuing a joint statement on crypto-asset safekeeping, emphasizing risk management without introducing new rules. This guidance underscores the Fed's focus on mitigating operational and technological risks, such as cybersecurity vulnerabilities and custody failures, which could ripple through the broader financial system.

Critically, the Fed's 2025 rescission of guidelines restricting non-FDIC-insured banks from engaging in crypto activities signals a shift toward reducing barriers for smaller institutions. This move aligns with the White House's digital asset agenda, which prioritizes innovation while maintaining investor protections. Yet, the Fed's hands-off approach raises questions: Can it effectively monitor systemic risks if it avoids imposing stricter requirements on crypto custody or lending?

Regulatory Barriers and the Path to Inclusion

The OCC and FDIC have taken more direct steps to lower barriers for banks. The OCC's Interpretive Letter 1183, for instance, allows national banks to custody crypto assets and pay blockchain fees without prior regulatory approval. Similarly, the FDIC's 2025 rescission of its prior approval requirement has encouraged banks to serve underserved populations, such as small businesses and unbanked individuals, who may benefit from crypto-based payment systems or stablecoin-driven financial services.

However, these reforms come with caveats. Banks must still navigate anti-money laundering (AML) and cybersecurity obligations, which can be costly for smaller institutions. For example, FinCEN's 2023-2024 updates to AML rules for crypto mixing services have increased compliance burdens, potentially limiting access for institutions lacking resources. This tension between regulatory clarity and operational feasibility could slow the pace of financial inclusion.

Systemic Risk: The Double-Edged Sword of Innovation

The SEC's recent no-action letters, permitting state trust companies (STCs) to act as crypto custodians, illustrate the risks of fragmented oversight. While this expands custody options, STCs often operate under less rigorous regulatory frameworks than federally chartered banks, raising concerns about investor protections. Commissioner Caroline Crenshaw has warned that such moves could erode the custody regime that has historically safeguarded assets.

Compounding these risks is the expiration of the Cybersecurity Information Sharing Act in late 2025, which has left financial institutions without shared threat intelligence. This gap increases vulnerability to cyberattacks, particularly for banks handling crypto assets-a sector already prone to high-profile breaches. The Fed's joint guidance on risk management may help, but it lacks enforceable standards, leaving institutions to self-police.

The Fed's Gatekeeping Dilemma

The Fed's role as a gatekeeper is further complicated by its interagency collaborations. For example, the SEC's "Project Crypto" initiative, which aims to modernize custody rules and create safe harbors for non-security tokens, relies on the Fed's input on systemic risk. Yet, the Fed's focus on macroeconomic stability may clash with the SEC's innovation-driven agenda.

This tension is evident in the debate over federal banking charters for crypto firms. While the OCC has conditionally approved charters for entities like First National Digital Currency Bank, critics argue that such firms could access banking benefits without comparable regulatory obligations, increasing systemic risk. The Fed's stance on these applications will likely shape whether crypto banking becomes a tool for inclusion or a source of instability.

Conclusion: Balancing Innovation and Stability

The U.S. regulatory landscape for crypto banking is at a crossroads. While the Fed's indirect influence and interagency efforts have reduced some barriers, systemic risks and inclusion gaps persist. For crypto banking to achieve its promise, regulators must strike a balance: fostering innovation without compromising the safeguards that underpin financial stability.

As the Fed navigates this terrain, its ability to coordinate with agencies like the OCC, FDIC, and SEC will determine whether crypto integration becomes a force for inclusion-or a catalyst for the next financial crisis.