Situation Overview: The federal banking agencies have withdrawn previously issued guidance related to banks’ crypto activities, marking a shift in regulatory posture toward digital asset engagement.
What: On April 25, the Federal Reserve Board announced the withdrawal of several guidance documents issued between 2022 and 2023 that outlined expectations for banks engaging in crypto-related activities. The move aligns the Fed with prior rescissions by the OCC and FDIC.
Who: Banks and financial institutions evaluating crypto-related services or partnerships, as well as stakeholders monitoring federal oversight of digital assets and banking innovation.
In Depth:
The federal banking agencies’ recent actions thus complete a whole-of-government regulatory shift to accommodate crypto-related innovation. Indeed, the Securities and Exchange Commission (SEC) recently withdrew or settled in nearly all of its crypto-related enforcement cases, and on April 8, the Commodity Futures Trading Commission (CFTC) announced its intention to “deprioritize” crypto-related enforcement actions involving violations of registration requirements under the Commodity Exchange Act, except in cases where the violation was willful.
For banks, the immediate effect is that their regulators, now including the Fed, are effectively starting with a clean slate on crypto policy and look to work collaboratively in shaping future policy. The Fed noted in its press release that it stands ready to “work with agencies to consider whether additional guidance to support innovation, including with respect to crypto-asset activities, is appropriate.” The incoming Vice Chair for Supervision, current Governor Michelle Bowman, has expressed the need to consider both the risks and opportunities that new technologies present to banks. Governor Bowman also echoed a similar sentiment in her Senate confirmation hearing, stating that “[t]o remains viable and competitive, banks must be able to consider new technologies that can improve products and services, lower costs” and “[r]egulators should adopt an approach that encourages and promotes sensible innovation.”
Implications for Traditional Banks and Crypto Firms
Against the backdrop of a clean regulatory slate, banks of all sizes may begin exploring a range of crypto-related activities. These may include acting as a custodian for crypto-assets or crypto-related products (e.g. exchange traded products), issuing their own enterprise stablecoin and/or blockchain, integrating blockchain-based payments solutions, and, more generally, unlocking synergies through strategic partnerships with crypto firms and other traditional financial institutions.
Going forward, the push by banks into crypto activities will inevitably lead to more intersections between traditional banks and crypto firms – including digital asset trading platforms, wallet providers, and stablecoin arrangements. Historically, unclear guidance and a highly cautious regulatory posture of federal financial regulators—and banking regulators in particular—made it very difficult for legitimate crypto-related businesses to successfully interact with the U.S. banking system.
What’s Next?
From a strategy perspective, the intersection between traditional banking and crypto-related activities may provide opportunities. In order to seize upon those opportunities, it may be advisable to constructively engage with regulators on best practices in areas like cybersecurity, consumer protection, and anti-fraud measures specific to crypto-related business activities.
From a risk and compliance perspective banking supervisors will continue to oversee bank practices in crypto activity, even though the federal banking agencies have withdrawn previous guidance. Over time, the federal banking agencies can be expected to provide clearer and potentially quite specific guidance on what “good” looks like for banks engaging in certain types of crypto-related activities. For now, in the absence of specific guidance, banks will be well served to approach crypto-related activities with safe and sound risk management principles in mind—and as possible, tailor compliance policies and procedures to the unique nature of crypto-related activities.
As banking regulators signal a new era of openness toward crypto-related activities, banks and crypto firms must carefully navigate evolving expectations and guidelines. The withdrawal of prior guidance presents both opportunities and risks for banks, payments companies, and crypto-native firms alike.
[View source.]
