Following several months of positive regulatory changes regarding cryptocurrencies, the Federal Reserve (Fed) announced a significant change in its approach to bank examinations on Monday, stating that reputational risk would no longer be considered in assessments.
This decision aligns with similar actions taken by other federal regulators and could pave the way for more lenient banking regulations concerning crypto assets in the United States.
Debanking In Crypto And Beyond
In its press release, the Federal Reserve emphasized that this change does not diminish its expectation for banks to maintain strong risk management practices to ensure safety, soundness, and compliance with laws and regulations in order to still maintain safety for digital asset investors.
The central bank clarified that while reputational risk will not be part of official examinations, banks may still incorporate it into their own risk management strategies.
Treasury Secretary Scott Bessent, who chairs the Financial Stability Oversight Council, advocated for this change during a recent meeting, highlighting the need for a more balanced regulatory approach.
Critics, particularly from the Republican side, have long argued that an overemphasis on reputational risk has led banks to debank or close accounts of customers engaged in certain industries, notably cryptocurrency, or even those with differing political views.
This practice has been a concern for bank industry groups, who have also pushed for a reevaluation of the reputational risk standard over the past years under the Biden administration
Easing Regulations
The Federal Reserve’s decision follows moves by other US banking regulators, including the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), to eliminate the reputational risk examination standard.
Banks had raised concerns that such scrutiny could lead to subjective judgments and penalize institutions for engaging in legally permissible activities, including crypto, that are not financially risky.
Despite dropping reputational risk from its examination criteria, the Federal Reserve reiterated its expectation for banks to maintain robust risk management systems.
This announcement opens the door for less stringent regulations on digital asset activities, allowing financial institutions to engage more freely in crypto projects and offerings.
The Securities and Exchange Commission (SEC) has also shown signs of easing regulations on crypto firms, reflecting a broader trend toward a more favorable regulatory environment for the cryptocurrency industry.
The reactions from both banking institutions and the crypto community have been overwhelmingly positive. Several banks are now exploring investments in cryptocurrency exchange-traded funds (ETFs) to offer their customers, contributing to a stabilization of digital asset prices.
Many within the crypto space view the Federal Reserve’s decision as a bullish indicator, suggesting a more welcoming atmosphere for digital assets in the financial sector.
Featured image from DALL-E, chart from TradingView.com
