Federal Reserve Drops Reputational Risk for Banks, Easing Crypto Industry Path

The US Federal Reserve Board announced on Monday that it is removing “reputational risk” as a supervisory tool for banks. This decision could significantly ease the path for crypto companies that have previously faced difficulties in dealing with banks, as reputational risk was often used as a reason for banks to avoid crypto-related businesses.

The US House Committee on Financial Services welcomed this move, stating that it aligns with efforts to limit bureaucratic overreach. The Committee's support underscores the growing recognition of the need to create a more favorable regulatory environment for the crypto industry.

The Federal Reserve has initiated the process of reviewing and removing references to reputation and reputational risk from its supervisory materials, including examination manuals. This action brings the Fed in line with other American bank regulators, such as the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, who have also moved to drop this examination standard.

Reputational risk has been a significant factor in the practice of debanking, where financial institutions evaluate a client’s suitability for access to their services based on potential risks. This has been a major obstacle for crypto companies, especially under the Biden administration's initiatives like Operation Chokepoint 2.0, which aimed to restrict access to banking services for certain industries.

More than 30 crypto and tech companies were denied US banking services following the 2023 crypto bank collapses, exacerbating industry-wide banking access problems. This move by the Federal Reserve is seen as a step towards clearing the path for banks to work with crypto companies without the fear of being flagged for it, as noted by Bitcoin OG Kyle Chassé.

In February, Representative Dan Meuser and other lawmakers sent a letter to the FDIC calling for clearer digital asset rules and anti-debanking measures. This letter highlighted the need for regulatory clarity and support for the crypto industry, which has long struggled with access to traditional banking services.

Debanking, the practice of banks closing or restricting access to accounts for individuals or organizations considered to pose a financial, legal, or reputational risk, continues to be a global issue. This practice can target entire industries, such as crypto, or individuals who make transactions with crypto exchanges. Debanking is particularly prevalent in developing countries where citizens often struggle to meet the extensive KYC documentation requirements demanded by banks.

This development from the Federal Reserve is a significant step towards creating a more inclusive financial environment for the crypto industry, potentially paving the way for greater innovation and adoption in the sector.