Federal Reserve Reverses Debanking Policies, Banks May No Longer Need Approval to Engage in Crypto Projects

The Federal Reserve has reversed its 2022 Supervisory Letter, which had required banks to give advance notice before engaging in any cryptocurrency activities. This follows many regulatory bodies in the United States, which are taking a different stance on crypto investment and freeing up capital to invest in crypto innovations. The Fed cited evolving changes in risk assessment and financial innovations, with banks at the forefront of these new developments, and a changing supply chain influenced by both local and offshore political actors. Banking regulators, such as the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), have made similar changes weeks ago, regarding the banking sector and its ability to choose which crypto industries it engages with. The changes stipulate that banks do not have to report investments before engaging with the crypto industry. Banks do not have to seek permission to invest in crypto innovations. The change comes as government officials frown on past practices of debanking. The regulators, however, have their reasons for distrusting the crypto sector, as they created these advisory policies immediately after the FTX collapse in January 2023. The FTX disaster was an embarrassment for regulators because it marked a stark failure for American regulators to prevent a brewing banking disaster right in front of everyone. The regulators considered any crypto activity, including trading, storing, or mining, to be contrary to good banking laws. Crypto innovators, however, especially those affected by debanking rules, would point out that anti-crypto regulations occurred long before the FTX crisis. The Federal Reserve has now joined these banks in reversing the 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 regulators, the FDIC and OCC, in reversing the draconian laws against crypto. The bankers, however, will still need guidance on crypto policies because Congress will need to develop suitable policies to ensure they conduct themselves appropriately. The Fed has stated that it wants to collaborate with other agencies, such as the FDIC and OCC, to ensure consistency in regulations. This is partly why the Fed has reversed its debanking policies, as it wishes to complement the FDIC and OCC. The Fed has stated that it may introduce new policies in the future, depending on the market, 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 Trump returns to the White House, easing regulatory restrictions and introducing more libertarian measures in the banking and crypto world. The OCC, moreover, 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 sting from draconian regulations and may still need time to recover from what was a loss of time and money.