Fed Drops Reputational Risk Barrier—Greenlights Banks to Embrace Crypto Clients

Regulators just handed crypto firms a backstage pass to mainstream finance. The Federal Reserve—alongside other watchdogs—axed the controversial 'reputational risk' clause that kept traditional banks at arm's length from digital asset companies.

No more red tape: Banks can now service crypto firms without sweating regulatory side-eye. The move effectively dismantles the last major banking roadblock—Wall Street's favorite excuse for avoiding crypto like a 2018 ICO.

Behind the policy shift? Pressure from pro-crypto legislators and a $2.3 trillion institutional custody market that banks were tired of watching from the sidelines. Even Jamie Dimon can't complain now—not while JPMorgan's blockchain division quietly onboarded three stablecoin issuers last quarter.

Cynical take: Nothing motivates regulators like realizing they're missing out on fees. Welcome to financial innovation—always late, but never voluntary.

Fed signals openness to regulated crypto activity

Chair Jerome Powell laid the groundwork for the shift in an April 16 speech at the Economic Club of Chicago, where hea stablecoin framework and stated that the Fed does not intend tobetween banks and crypto firms. 

Back then, the GENIUS Act was stuck in Congress. Yet, this scenario changed after the Senatefor consideration following a 51-23 vote on June 17.

Furthermore, Powell acknowledged that regulators adopted a conservative stance after the 2022 market failures but said some guidance “may be relaxed to accommodate responsible innovation.” 

He pointed to crypto custody services alreadyand pledged to preserve safety while allowing institutions to “engage with digital assets in a way we understand.”

Powell’s remarks echo testimony he gave to Congress in February, where he confirmed that existing supervisory frameworks permit banks to handle crypto so long as they manage capital, liquidity, and operational risks. 

The Federal Reserve’s directive completes a three-month effort by federal regulators to remove reputational risk from bank supervision policy, leaving operational, legal, and financial criteria as the sole grounds for examiner action.