The US Federal Reserve Board on Monday directed its supervisors to remove “reputational risk” from its bank oversight program. Under this guideline, industries deemed risky by the central bank, such as crypto entities, faced significant challenges in establishing or maintaining banking relationships.
Crypto proponents have long argued that the premise was used to unfairly target more than 30 technology and crypto companies under Operation Chokepoint 2.0, denying them banking services in the United States.
US Bank Regulators Drop “Reputational Risk” Rule Blocking Crypto Services
The Federal Reserve defines reputational risk as a potential case where negative publicity regarding an institution’s business practices, whether true or not, causes a decline in the customer base, costly litigation, or revenue reductions.
In a statement released on June 23, the Fed Board said that it has begun reviewing and removing references to reputation and reputational risk from its supervisory materials to replace them with more “specific discussions” surrounding financial risk. The regulatory authority will also train examiners and ensure that the change is implemented consistently across all banks under its oversight.
The move places the Federal Reserve on equal footing with federal bank regulatory agencies such as the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency, which adopted a similar approach earlier this year.
In May, the US Office of the Comptroller of the Currency confirmed that banks under its jurisdiction will be allowed to trade cryptocurrencies on behalf of customers and outsource some crypto-related activities to third parties. In March, the FDIC announced that institutions under its regulatory regime can engage in crypto-related activities without prior approval.
Together, these three agencies oversee every federally-insured depository institution in the US, and their coordinated revisions eliminate a controversial standard that experts claim allowed regulators to block banking services to crypto firms and prevented banks from offering crypto-related services as simple as buying and selling cryptocurrencies on behalf of their retail customers.
Despite the updated guidelines, the Federal Reserve Board emphasized that it still expects banks to maintain robust risk management frameworks that comply with all laws and regulations. The agency also clarified that supervisors should address reputational effects only through specific legal, liquidity, or credit channels.
The statement noted that the change is not intended to impact “whether and how” banks supervised by the Board use the concept of reputational risk in their own risk management practices.
Fed Chair: Central Bank Doesn’t Want To Limit Banks – Crypto Communications
Fed Chairman Jerome Powell laid the foundation for the rule change in an April 16 speech at the Economic Club of Chicago, where he urged the US Congress to establish a stablecoin framework, reiterating that the central bank does not intend to limit lawful relationships between banks and crypto firms.
At the time, the GENIUS Act was still under consideration in Congress. However, since then, the landmark US stablecoin legislation passed the Senate in a 51-23 vote on June 17, with the draft bill sent to the House of Representatives for further consideration.
Powell acknowledged the conservative stance that regulators took in terms of crypto following the 2022 market crash, but said that some of the central bank’s guidance may be relaxed to accommodate “responsible innovation” in the sector. This will allow banks under its oversight to engage in crypto custody services. He also promised to preserve consumer protection measures and allow institutions to engage with digital assets in a way that is understandable to regulators.
The Fed Chair’s remarks echo his testimony at Congress in February, where he confirmed that existing supervisory frameworks allow banks to handle crypto as long as the institutions manage capital, liquidity, and operational risks.
The latest directive completes a three-month effort by US regulators to remove reputational risk as a condition from their bank supervision policy. This leaves operational, legal, and financial criteria as the sole grounds for examiner action.
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Lawmakers and Bankers Welcomes New Rules Integrating Crypto into Banking Services
Senator Cynthia Lummis, one of the strongest supporters of cryptocurrencies among lawmakers and co-sponsor of the BITCOIN Act, a legislation aimed at establishing a US strategic Bitcoin stockpile, said that the Fed’s aggressive reputation risk policies in the past “assassinated” American Bitcoin and digital asset businesses. She called the change a “win” for the sector but said there is still more work to be done.
Rob Nichols, president and CEO of the American Bankers Association, a lobby group for US banks, released a statement in which he applauded the Fed’s decision and said the change will make the supervisory process more transparent and consistent. He added that member banks in the association have long believed they should be able to make business decisions based on prudent risk management and the free market, and not on the “individual perspectives” of regulators.
However, critics argue that eliminating the reputational risk guideline could obscure non-financial issues, impact the bank’s stability, weaken regulatory oversight, and potentially fuel riskier bank practices.
Nevertheless, US regulators and oversight agencies have begun winding down previously held restrictions against crypto activities. The move comes as President Donald Trump declared unequivocal support for the digital asset industry, promising to introduce friendly regulations and signing an executive order establishing a federal strategic Bitcoin reserve and digital asset stockpile.
