Federal Reserve Reverses Crypto Restrictions, Banks Gain Investment Freedom

The Federal Reserve has reversed its 2022 Supervisory Letter, which previously required banks to provide advance notice before engaging in any cryptocurrency activities. This shift in policy aligns with a broader trend among U.S. regulatory bodies, which are adopting a more lenient stance on crypto investments and freeing up capital for innovation in the sector. The Fed cited evolving changes in risk assessment and financial innovations, with banks at the forefront of these new developments, as well as a changing supply chain influenced by both local and offshore political actors.

Other banking regulators, such as the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), have made similar changes in recent weeks. These changes stipulate that banks no longer need to report investments before engaging with the crypto industry or seek permission to invest in crypto innovations. This policy reversal comes as government officials express disapproval of past debanking practices. The regulators initially created these advisory policies immediately after the FTX collapse in January 2023, which was seen as a failure for American regulators to prevent a brewing banking disaster. The regulators considered any crypto activity, including trading, storing, or mining, to be contrary to good banking laws. However, crypto innovators argue that anti-crypto regulations predated the FTX crisis.

The Federal Reserve has now joined other regulators in reversing these negative policies, allowing banks to invest in crypto without seeking pre-approval. Banks will now have the freedom to make their own discretionary decisions about crypto investments, using their own trained staff, such as compliance executives and managers, to conduct good banking practices. The Fed has joined with the FDIC and OCC in reversing the draconian laws against crypto. However, bankers will still need guidance on crypto policies as Congress develops suitable regulations to ensure appropriate conduct.

The Fed has stated its intention to collaborate with other agencies, such as the FDIC and OCC, to ensure consistency in regulations. This collaboration is partly why the Fed has reversed its debanking policies, aiming to complement the efforts of the FDIC and OCC. The Fed has also indicated that it may introduce new policies in the future, depending on market conditions, to better adapt to crypto innovations. In March, the OCC rolled back its debanking policies, stating that national banks and federal savings associations could engage with crypto, allowing these institutions to use stablecoins or participate in decentralized platforms.

In March, the FDIC also announced that banks do not need to seek approval to engage with crypto assets and can use their risk assessments and discretionary powers to make investment decisions. These changes come as regulatory restrictions are eased and more libertarian measures are introduced in the banking and crypto world. The OCC has stated that it would stop assessing banks for reputation risk, which was one of the reasons it restricted the use of crypto banking. The crypto industry, however, still feels the impact of draconian regulations and may need time to recover from the loss of time and money.