Crypto Scores Major Victory as FDIC Removes Reputational Risk Rule

Federal officials are shifting away from a controversial banking oversight tool after sustained criticism from lawmakers and the crypto industry.

The White House crypto czar has hailed a key regulatory shift as the Federal Deposit Insurance Corporation (FDIC) will no longer use “reputational risk” as a criterion in bank supervision.

This move aligns with guidance from the U.S. Office of the Comptroller of the Currency (OCC) and follows criticism from lawmakers and the crypto industry.

Announcing the development on Friday, the officials stated that the FDIC will no longer include reputational risk as a factor in its Community Bank supervisory practices. The move follows the introduction of the Financial Integrity and Regulation Management (FIRM) Act by U.S. Senator Tim Scott earlier this month.

The FIRM Act aims to prohibit the use of “reputational risk” in federal banking oversight and prevent regulators from using subjective criteria to influence banks’ decisions on serving legally operating businesses.

Republican members of the Senate Banking Committee added that the FDIC will eliminate reputational risk from bank supervision.

“The FDIC is going to eliminate the use of reputational risk as a component of bank supervision,” the committee members said in a joint statement.

Their remarks further noted that the move follows the advancement of the FIRM Act, which seeks to codify the policy across all federal financial regulators.

The officials also thanked Senator Scott for his leadership on the legislation.

“Thank you to Senator Tim Scott for his leadership on this via the FIRM Act,” one of the officials said.

Earlier this year, the OCC announced that it would no longer consider reputational risk in its bank supervision activities. The move came in response to concerns raised by lawmakers and industry groups that the factor was being used to unfairly discriminate against certain types of businesses.

In January, the OCC updated its bank supervision principles to remove reputational risk as a relevant factor in evaluating a bank’s overall risk management practices.

The changes also align with the Biden administration’s stated priorities of promoting economic growth and opportunity.

The FDIC’s decision is a major victory for the crypto industry, which has been arguing for years that the reputational risk factor is unduly burdensome and stifles innovation.

The industry trade group, the Blockchain Association, had urged the FDIC to remove the factor from its supervisory practices.

“We are grateful to the FDIC for heeding the warnings of economists, legal scholars, and bipartisan lawmakers about the dangers of reputational risk,” the association said in a statement.

The group added that the factor could be used to discriminate against any type of business that is the target of political or social campaigns.

“This broad authority to intervene in the operations of any bank, for any reason, is a dangerous overstep by the FDIC,” the association said.

The changes to the Community Bank supervisory practices are part of the FDIC’s broader effort to modernize its supervisory framework.

The agency is also working on a new strategic plan for the next five years.

In other news, the FDIC has announced that banks can now engage in legally permitted cryptocurrency activities without prior regulatory approval, provided they appropriately manage associated risks.

This policy shift, outlined in a new Frequently Asked Questions (FAQ) document released on Friday, inverts the previous requirement for banks to obtain advance permission for any crypto-related activities.

The updated policy aligns with the Biden administration’s focus on promoting responsible innovation in emerging technologies.

The FAQ document, which covers various topics including bank mergers and the use of artificial intelligence (AI), also includes a section on crypto-related activities.

The FDIC stated that banks are permitted to engage in such activities as long as they are consistent with applicable federal banking law and regulations and are appropriately managed by the bank.

This includes integrating crypto-related activities into the bank’s risk management framework and internal controls.

The changes to the Community Bank supervisory practices are part of the FDIC’s broader effort to modernize its supervisory framework.

The agency is also working on a new strategic plan for the next five years.

In January, the OCC updated its bank supervision principles to remove reputational risk as a relevant factor in evaluating a bank’s overall risk management practices.

The changes align with the Biden administration’s stated priorities of promoting economic growth and opportunity.

Earlier this year, the OCC announced that it would no longer consider reputational risk in its bank supervision activities.

The move came in response to concerns raised by lawmakers and industry groups that the factor was being used to unfairly discriminate against certain types of businesses.

The changes to the Community Bank supervisory practices are part of the FDIC’s broader effort to modernize its supervisory framework.

The agency is also working on a new strategic plan for the next five years.

In January, the OCC updated its bank supervision principles to remove reputational risk as a relevant factor in evaluating a bank’s overall risk management practices.

The changes align with the Biden administration’s stated priorities of promoting economic growth and opportunity.

Earlier this year, the OCC announced that it would no longer consider reputational risk in its bank supervision activities