Federal Reserve Overhauls Banking Rules to Allow Uninsured Crypto Participation
The Federal Reserve Board took a decisive step on Wednesday, December 17, 2025, by officially withdrawing a restrictive 2023 policy statement that had effectively barred many state-chartered banks from the cryptocurrency sector. This major regulatory pivot centers on the interpretation of Section 9(13) of the Federal Reserve Act, which previously imposed a “strong presumption” against allowing state member banks to engage in activities not explicitly permitted for national banks. By rescinding this guidance, the central bank is creating a new pathway for both insured and uninsured state member banks to viewk permission for “innovative activities,” signaling a broader shift toward integrating digital assets into the formal U.S. banking system.
Dismantling Barriers for Uninsured State Member Banks
The 2023 policy was originally implemented during a period of intense regulatory scrutiny following the collapse of major crypto platforms and the failure of several crypto-friendly banks. At that time, the Fed aimed to level the playing field by ensuring that all banks, regardless of their insurance status, adhered to the identical narrow set of permissible activities as national banks supervised by the Office of the Comptroller of the Currency. In practice, this meant that uninsured institutions, such as Wyoming-chartered “special purpose” banks, were frequently denied access to the Fed’s master accounts and payment systems if they intended to hold digital assets on their balance sheets or provide stablecoin services. The withdrawal of this policy acknowledges that the financial system and the Board’s own understanding of these technologies have matured, making the rigid restrictions of the past two years no longer appropriate for a modern economy.
Under the updated 2025 framework, the Federal Reserve will now evaluate applications from uninsured banks on a case-by-case basis rather than applying a blanket presumption of denial. This change is particularly significant for institutions like Custodia Bank, which has long challenged the Fed’s authority to block its entry into the central banking system. By adopting the principle of “diverse activity, diverse risks, diverse regulation,” the Board is moving away from the “identical risk, identical regulation” mantra that critics argued stifled innovation.
Regulatory Dissent and the Future of Financial Stability
The decision to rescined the policy was not unanimous, passing with a 6 to 1 vote that highlighted deep divisions within the Federal Reserve’s leadership regarding the pace of crypto adoption. Vice Chair for Supervision Michelle W. Bowman, a vocal proponent of the change, argued that creating a pathway for responsible innovation is essential for ensuring that the U.S. banking sector remains efficient and competitive. She noted that new technologies offer significant potential for improving bank operations and customer services, provided they are implemented within a clear regulatory structure. This perspective reflects an emerging consensus in Washington that the U.S. must provide a stable legal environment for digital finance to prevent capital and talent from migrating to offshore jurisdictions with more favorable rules.
However, the dissenting vote from Governor Michael S. Barr underscores the persistent concerns about systemic risk and “regulatory arbitrage.” In his dissent, Barr warned that rescinding the 2023 policy could encourage banks to viewk out state charters with the least restrictive rules, potentially undermining the stability of the entire financial network. He argued that the original policy provided a vital secureguard by ensuring that the identical banking activities were subject to the identical regulatory standards across all types of institutions. As the Federal Reserve begins to review new applications for crypto-related services, the industry will be watching closely to view how the Board balances this commitment to innovation with the need to prevent the kind of contagion that rocked the markets in ahead 2023.
