US Federal Reserve withdraws anti-crypto banking guidance

The US Federal Reserve has been under fire for some time over guidance it gave previously to banks around crypto related products, which led to banks shunning the crypto industry, a stunning about face has seen this guidance withdrawn and banks freed from requirements to seek permission before engaging in crypto related products. In 2022, the Fed issued a 'supervisory letter' stating that:

A supervised banking organization should notify its lead supervisory point of contact at the Federal Reserve prior to engaging in any crypto-asset-related activity.... State member banks are also encouraged to notify their state regulator prior to engaging in any crypto-asset-related activity.

This was broadly interpreted as discouraging banks from engaging in crypto and in 2023 a further letter was issued describing a 'supervisory nonobjection process' requiring banks to notify the Fed and await permission to engage in crypto related products, and if permission was granted, the bank would:

continue to be subject to supervisory review and heightened monitoring of these activities

Given the substantial risks and costs of being subject to enhanced supervisory review for a bank, unsurprisingly these guidance letters led to crypto companies being given the cold shoulder.

The overall restrictions on banking have been called "Operation Chokepoint 2.0" in reference to the Obama administration's efforts to secretly restrict banking services to industries deemed undesirable using 'reputational risk' as a broad catch all.

Coinbase obtained documents under Freedom of Information concerning Operation Chokepoint 2.0 which one commentator called:

damning evidence of ... discouraging banks from engaging in crypto-related activities. The unredacted letters and supporting documents reveal a deliberate and coordinated campaign to suffocate crypto innovation under the guise of consumer protection and financial stability.

In a stunning turn, the US Fed has withdrawn all of the guidance, which should free banks to now experiment with crypto products in ways they were doing before the guidance was issued. This is seen as ongoing efforts of the Trump Administration to encourage innovation through cryptocurrency and blockchain technology, and while the shadows of the past guidance are sure to linger, many banks are extremely keen to get more involved, and publicly so, in crypto and blockchain.

By Michael Bacina with Steven Pettigrove