The U.S. Federal Reserve recently announced that it has instructed its regulators to no longer consider "reputational risk" factors in bank supervision, a standard that the cryptocurrency industry has long pointed out was used to unfairly target cryptocurrency companies and disqualify them from banking services.

Industries identified as high-risk face significant challenges in establishing or maintaining banking relationships, which is seen as driving the so-called "Operation Choke Point 2.0," leading to over 30 tech and cryptocurrency companies being denied services by banks in the U.S.

In a statement released on Monday, the Federal Reserve indicated that it has begun reviewing and removing references related to reputation and reputational risk from its regulatory materials, replacing them with more "specific and clear" discussions of financial risks.

At the same time, the Federal Reserve plans to train examiners to ensure that this policy change is consistently implemented across the banks under its supervision and to collaborate with other federal banking regulatory agencies to promote consistency in regulatory practices.

Despite the policy change, the Federal Reserve emphasized that it still expects banks to maintain strong risk management systems to ensure compliance with all laws and regulations.

This change "is not intended to affect whether and how banks under the Federal Reserve's supervision use the concept of reputational risk in their own risk management practices."

The Federal Reserve defines reputational risk as: the potential for negative publicity (whether true or not) regarding an institution's business practices to lead to customer attrition, high litigation costs, or reduced revenue.

U.S. Senator Cynthia Lummis noted that the previously aggressive reputational risk policy "seriously harmed U.S. Bitcoin and digital asset businesses," adding, "This is a victory, but we still have more work to do."

Rob Nichols, president and CEO of the American Bankers Association, a banking industry lobbying group, praised the decision in a statement, noting, "This change will make the regulatory process more transparent and consistent."

He further stated, "We have always believed that banks should be able to make business decisions based on prudent risk management and free market principles, rather than being constrained by the personal views of regulators."

However, critics argue that removing the consideration of reputational risk may obscure non-financial issues, affect bank stability, weaken regulatory oversight, and potentially encourage riskier banking practices.

This year, other U.S. regulatory agencies and oversight bodies have also begun to relax restrictions related to cryptocurrencies.

The Office of the Comptroller of the Currency confirmed in May that banks under its jurisdiction can trade cryptocurrencies on behalf of customers and outsource certain cryptocurrency activities to third-party institutions.

The Federal Deposit Insurance Corporation (an independent federal government agency) also stated in a public letter in March that financial institutions (including banks) under its supervision can now engage in cryptocurrency-related activities without prior approval.

Related: Bitcoin ASIC manufacturer Canaan has launched pilot production in the U.S. and exited the AI business.

Original: “Federal Reserve Cuts ‘Reputational Risk’ Review Targeting Crypto Companies”

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