Caitlin Long's Challenge to U.S. Fed's Crypto Policies and Its Implications for Institutional Adoption

The U.S. crypto landscape in 2025 is defined by a tug-of-war between regulatory caution and legislative ambition. At the center of this conflict is Caitlin Long, CEO of Custodia Bank, whose relentless critiques of the Federal Reserve's crypto policies have exposed a critical fault line in the institutional adoption of digital assets. While the Fed has taken steps to reduce procedural hurdles for banks—such as rescinding 2022 and 2023 supervisory letters that required advance notifications for crypto activities—it has simultaneously maintained a key anti-crypto rule from January 2023. This rule explicitly prohibits banks from directly engaging with crypto assets or issuing stablecoins on public blockchains, effectively favoring permissioned, bank-backed stablecoins over decentralized alternatives Caitlin Long slams US Fed over stablecoin policy^[1].

Regulatory Evolution: A Double-Edged Sword

The Fed's mixed messaging has created a paradox for institutional investors. On one hand, the withdrawal of restrictive guidance in April 2025 signals a shift toward fostering innovation, as banks are no longer required to seek prior approval for crypto activities. The Federal Reserve Board emphasized that it would monitor these activities through standard supervisory processes, reducing bureaucratic friction Caitlin Long slams US Fed over stablecoin policy^[1]. On the other hand, the retention of Section 9(13)—which labels Bitcoin and digital assets as “unsafe and unsound”—continues to stifle meaningful participation in crypto markets. For example, banks remain barred from covering gas fees for on-chain transactions, a standard practice for crypto custodians, or acting as market-makers in major cryptocurrencies like Bitcoin and Ether Caitlin Long slams US Fed over stablecoin policy^[1].

This regulatory ambiguity has left institutions in a limbo. While the Fed's recent actions suggest a willingness to adapt, its continued enforcement of policies favoring permissioned stablecoins creates a fragmented playing field. As Long argues, this approach gives traditional financial institutions a “head start” in launching private stablecoins, while the broader market must wait for federal legislation to clarify the rules Caitlin Long slams US Fed over stablecoin policy^[1].

Legislative Momentum: The GENIUS Act and Beyond

The void left by the Fed's indecision has been filled by Congress, which passed the GENIUS Act in July 2025 under President Trump. This landmark legislation established a framework for payment stablecoins, requiring 1:1 reserve backing, independent audits, and strict AML/KYC compliance Crypto Regulation in the U.S.: Summer 2025 Legislative^[2]. By formalizing stablecoin oversight, the act aims to promote U.S. dollar dominance in the crypto space while addressing risks like liquidity volatility. Meanwhile, the pending CLARITY Act seeks to define regulatory jurisdiction between the SEC and CFTC, potentially resolving the “regulatory whack-a-mole” problem that has hindered institutional entry Crypto Regulation in the U.S.: Summer 2025 Legislative^[2].

These legislative efforts reflect a broader strategy to position the U.S. as a global leader in digital asset innovation. However, they also highlight the tension between the Trump administration's pro-crypto agenda and the Fed's cautious stance. Long has warned of a potential showdown between the Treasury Department and the Fed, particularly regarding the proposed Strategic Bitcoin Reserve—a policy that could force the Fed to grant access to crypto-friendly banks like Custodia Exclusive: Caitlin Long warns of ‘big fight’ brewing^[3].

Implications for Institutional Adoption

The interplay between regulatory evolution and legislative action has profound implications for institutional investors. On one hand, the Fed's reduced procedural hurdles and the GENIUS Act's clarity on stablecoin reserves could incentivize banks to explore crypto custody and trading services. The Office of the Comptroller of the Currency's recent guidance, which permits banks to offer crypto custody and facilitate fiat-crypto exchanges, further supports this trend Caitlin Long slams US Fed over stablecoin policy^[1].

On the other hand, the Fed's retention of restrictive policies—such as prohibitions on covering gas fees and engaging in on-chain transactions—remains a barrier. These rules create operational inefficiencies for institutions seeking to offer custody services, as highlighted by Long's critique that they add “sand in the wheels” of market entry Caitlin Long slams US Fed over stablecoin policy^[1]. Additionally, the Fed's Section 9(13) policy continues to cast a shadow over institutional risk assessments, with many banks reluctant to expose their balance sheets to crypto assets labeled as “unsafe.”

The Path Forward: Regulatory Clarity as a Catalyst

For institutional adoption to accelerate, the U.S. must resolve the tension between the Fed's cautious approach and Congress's pro-innovation agenda. Long's advocacy underscores the need for stablecoin legislation to override the Fed's restrictive policies, creating a level playing field for both permissioned and permissionless blockchains. If the CLARITY Act passes, it could further reduce regulatory uncertainty by clarifying jurisdictional boundaries, enabling institutions to navigate compliance more effectively.

However, the risk of regulatory fragmentation persists. The Anti-CBDC Surveillance State Act, which seeks to block the Fed from issuing a central bank digital currency without congressional approval, reflects broader skepticism toward centralized control. This could delay the development of a U.S. CBDC, which many analysts view as a critical tool for competing with China's digital yuan.

Conclusion

Caitlin Long's challenge to the Fed's crypto policies encapsulates the broader struggle between regulatory inertia and legislative ambition. While the Fed's recent steps to reduce procedural hurdles are encouraging, its continued enforcement of policies favoring big banks highlights the need for comprehensive reform. For institutional investors, the path to meaningful crypto adoption hinges on regulatory clarity—a catalyst that can either unlock trillions in value or perpetuate the status quo of fragmented, risk-averse participation. As the U.S. navigates this crossroads, the outcome will shape not only the future of digital assets but the global financial system itself.