• Key insight: The Federal Reserve is loosening its reins on crypto activities allowed for banks, with particular attention paid to noninsured state-chartered banks.
• What's at stake: Custodia, a special purpose depository institution, has been engaged in a lawsuit against the Fed over the central bank's denial of Custodia's application for a master account.
• Expert quote: "I cannot agree to rescind the current policy statement and adopt a new one that would, in effect, encourage regulatory arbitrage." — Fed Gov. Michael Barr.

WASHINGTON — The Federal Reserve has scrapped a 2023 policy statement that tried to limit some banks' use of crypto-asset activities. "Since the policy statement was published, the financial system and the Board's understanding of innovative products and services have evolved," the Fed said in a Wednesday press release. "As a result, the 2023 policy statement is no longer appropriate and has been withdrawn." 

Specifically, that policy limited state member banks supervised by the Fed board from engaging with crypto activities that weren't allowed by other federal bank regulatory agencies. 

The Fed replaced that policy statement with guidance that seeks to "facilitate innovation" by distinguishing between uninsured state member banks and insured ones. The uninsured state member banks, the Fed said, may be permitted by the board to engage in those activities, so long as they are "conducted in a manner consistent with bank safety and soundness and persevering the stability of the U.S. financial system." 

Those uninsured crypto banks include special purpose depository institutions like Custodia, a Wyoming-chartered SDPI that was denied a master account by the Fed during the Biden administration. SPDIs have notched significant wins during the second Trump administration, particularly with the passage of the GENIUS stablecoin bill into law, which allows SPDIs to operate in states other than those where they are chartered without the approval of each host state's banking regulator.

"New technologies offer efficiencies to banks and improved products and services to bank customers," Vice Chair for Supervision Michelle Bowman said in a statement. "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 Gov. Michael Barr, who had been the Fed's top regulator until his resignation from that role in February, dissented to the most recent policy change, saying that the 2023 policy statement was made unanimously, and that it affirmed the general principle that same bank activity presenting the same risks should be subject to the same regulatory framework. 

"As noted in the statement, this principle of equal treatment helps to level the competitive playing field among banks with different charters and different federal supervisors, mitigating the risks of regulatory arbitrage," Barr said in a statement. "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."