Uninsured Banks Secure New Win as Fed Scraps 2023 Crypto Restrictions

The Federal Reserve Board formally withdrew a controversial 2023 policy statement on Wednesday, dismantling regulatory barriers that had restricted state-chartered banks from engaging in cryptocurrency activities.

The Board replaced the guidance, enacted in January 2023 during the post-FTX crackdown, with a new framework explicitly designed to facilitate “responsible innovation.” The updated policy creates a regulatory pathway for both insured and uninsured Board-supervised banks to hold digital assets. This reverses a rule that previously limited them to activities permitted for FDIC-insured national banks.

A Shift Toward “Modern” Banking

Federal Reserve Governor Michelle W. Bowman, a vocal advocate for regulatory clarity who has frequently clashed with the agency’s stricter stances, positioned the move as a necessary evolution for the U.S. banking system.

“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,” Bowman said in the official announcement.

The Federal Reserve stated that the restrictive 2023 policy was “no longer appropriate” as the financial system and the agency’s understanding of innovative products have evolved.

The Custodia Battle

The policy shift drew immediate reaction from Caitlin Long, CEO of Wyoming-based Custodia Bank. Custodia has been engaged in a prolonged legal battle with the Fed after being denied a master account, a critical component for accessing the central bank’s payment rails, under the previous regime.

Long alleged on X that the rescinded guidance had been weaponized retroactively. She claimed the Fed “broke the law” by citing the guidance to deny Custodia’s application in early 2023 before the rule was officially finalized.

“Per insiders, we now know that [Michael] Barr directed Fed staff to ‘find something’ to deny Custodia at the time… and the now-rescinded guidance was part of what he & his team ‘found’,” Long wrote.

Internal Dissent

The decision to rescind the policy was not unanimous. Michael Barr, the Vice Chair for Supervision appointed by the Biden administration, cast the sole dissenting vote. Long referred to Barr as the “debanker-in-chief,” crediting the policy reversal to waning influence from the previous administration’s regulatory team. “Most of that team is now gone or out of power at the Fed,” Long stated. “Nature is healing.”

Regulatory Context

The industry widely viewed the original January 2023 policy as part of a coordinated effort to insulate the traditional banking system from the digital asset sector. It prevented state-chartered Special Purpose Depository Institutions (SPDIs) from operating by tethering their permissible activities to those of traditional national banks, which were largely barred from holding crypto.

The new policy statement decouples state member banks from these federal limitations, allowing for a broader range of activities under Fed supervision.

Chain Street’s Take

The Fed didn’t just change a rule but admitted the “containment” strategy failed. By explicitly opening the door for uninsured institutions, a direct nod to models like Custodia, the Board is acknowledging that innovation can’t be safely regulated if it’s forced into the shadows or offshore. 

Michael Barr’s lonely dissent speaks volumes: the era of blanket “crypto is too risky” obstruction is ending. The real question now: Will the master accounts actually follow, or is this just a change in paperwork?