US Fed Withdraws Crypto Banking Restrictions, Opens New Pathway for Banks

Source: Cointime Original Title: US Fed pulls guidance blocking its banks from engaging with crypto Original Link: The US Federal Reserve has withdrawn a 2023 guidance that limited how Fed-supervised banks, including uninsured ones, engaged with crypto, as US regulators continue to pivot positively toward digital assets.

The 2023 guidance required uninsured banks to follow the same rules as federally insured institutions, based on the principle that similar activities pose similar risks and should be subject to identical regulation.

This prevented uninsured banks from engaging in activities that weren’t permitted for national banks, like crypto services, which automatically disqualified Fed membership because the institution’s primary activities weren’t allowed.

Fed says financial system has evolved since 2023

The Fed said a key reason for withdrawing the guidance was that it was outdated and “the financial system and the Board’s understanding of innovative products and services have evolved.”

“As a result, the 2023 policy statement is no longer appropriate and has been withdrawn,” it said.

Caitlin Long, the CEO of the crypto-focused Custodia Bank, applauded the move, explaining the 2023 guidance was why her institution’s application for a master account was previously denied.

A master account with the Fed enables a financial institution to hold balances directly with the US central bank and access its core payment systems, allowing for payment settlement in central bank money rather than relying on another bank as an intermediary.

“The Fed broke the law by citing this very guidance in the Custodia denial, even though the guidance hadn’t become official yet, that didn’t happen until Feb 2023,” Long said.

“But most of that team is now gone or out of power at the Fed. Nature is healing,” she added.

New guidance to boost bank innovation

The move came as the Federal Reserve issued new guidance to establish a formal pathway for both insured and uninsured Federal Reserve-supervised state member banks to pursue “innovative activities,” such as cryptocurrencies, provided risk-management expectations are met.

Fed vice chair for Supervision Michelle Bowman said that by “creating a pathway for responsible, innovative products and services, the Board is helping ensure that the banking sector remains safe and sound while also modern, efficient, and effective.”

Fed decision wasn’t unanimous

Fed Governor Michael Barr dissented to the decision, arguing that the principle of equal treatment among banks helps maintain a level playing field and prevents regulatory arbitrage.

“This principle continues to hold true today. Therefore, I cannot agree to rescind the current policy statement and adopt a new one that would, in effect, encourage regulatory arbitrage, undermine a level playing field, and promote incentives misaligned with maintaining financial stability. I dissent,” he said.

Barr has been accused of links to federal efforts to debank crypto companies. However, he was also previously an adviser at a major blockchain project and has pushed for responsible stablecoin regulation.