Fed Rescinds 2023 Crypto Bank Guidance, Custodia Focus

The Federal Reserve on Dec. 17 voted to rescind guidance it adopted in January 2023 that restricted how uninsured state member banks could operate. The move unwinds a policy introduced during a period of heightened regulatory pressure after the collapse of FTX.

The withdrawn guidance had imposed a strict “same activity, same risks, same regulation” standard. As a result, uninsured state member banks faced limits similar to those applied to federally insured banks, including sharp constraints on crypto related activities.

In its place, the Fed approved a new policy framework that allows more tailored supervision. The updated approach recognizes that different bank structures can present different risks, while still emphasizing safety, soundness, and financial stability.

Custodia Case Draws Fresh Scrutiny

The reversal has renewed attention on the Fed’s January 2023 denial of Custodia Bank’s application to join the Federal Reserve System. That denial was issued the same day the now rescinded guidance was announced, although the policy did not formally take effect until February 2023.

Custodia, a Wyoming chartered digital asset bank, has argued that the Fed relied on guidance that was not yet final when rejecting its application. Caitlin Long, Custodia’s founder and chief executive officer, said the timing shows the denial rested on a flawed regulatory process.

Long also cited internal accounts suggesting senior Fed leadership urged staff to find reasons to block Custodia soon after FTX failed in November 2022. According to those accounts, the January 2023 guidance later used in the denial emerged from that internal review.

Barr Dissent Signals Policy Divide

The Fed’s decision passed with support from Vice Chair for Supervision Michelle Bowman and Governor Christopher Waller. Their votes reflected growing disagreement within the central bank over how far crypto related restrictions should extend.

Vice Chair for Supervision Michael Barr dissented from the decision. He warned that rescinding the guidance could weaken regulatory consistency and encourage banks to seek out looser oversight through specific charters.

The Fed said the change does not reverse past supervisory decisions or reopen closed cases, including Custodia’s application. Instead, it sets a revised framework for future reviews, leaving the practical impact to be determined by how the policy is applied going forward.