Federal Reserve removes 'reputational risk' from bank examinations in a 'win' against crypto debanking

The United States Federal Reserve moved to eradicate reputational risk as part of its examination program for banks, opting instead to replace the term with more specific financial risk discussions, according to a Monday release . 

The move aims to provide clearer guidelines for banking supervision. It could also free up banks to serve digital asset firms and other crypto industry participants who have decried " debanking " as a hindrance to large-scale crypto adoption in the U.S. 

"The formal rating is intended to highlight and incorporate both the quantitative and qualitative aspects of an examiner’s review of an institution’s overall process for identifying, measuring, monitoring, and controlling risk and to facilitate appropriate follow-up action," the Board of Governors of the Federal Reserve System said in a letter on Monday.

"This change does not alter the Board's expectation that banks maintain strong risk management to ensure safety and soundness and compliance with law and regulation nor is it intended to impact whether and how Board-supervised banks use the concept of reputational risk in their own risk management practices," the board added. 

Regarding the Federal Reserve's move, pro-crypto Wyoming Senator Cynthia Lummis said in a social media post that "This is a win, but there is still more work to be done." 

The Federal Reserve joins the Office of the Comptroller of the Currency ( OCC ) and Federal Deposit Insurance Corporation ( FDIC ) in removing to end reputational risk examinations for banks. Senate Banking Committee Chair Tim Scott also introduced a bill aiming to prevent reputational risk as a component of bank supervision in March, The Block previously reported.  

" Debanking " is when a bank terminates accounts deemed risky, such as with extreme political affiliations or high likelihood for fraud. Crypto industry leaders have long complained about the difficulty of forging and maintaining banking relationships.

However, this state of affairs was escalated following the collapse of FTX, when national banking regulators and the Biden administration appear to have purposefully targeted the digital asset industry and encouraged financial institutions to cut ties with crypto clients in a campaign dubbed " Operation Chokepoint 2.0 " by Castle Island Ventures co-founder Nic Carter . 

In March, President Donald Trump alleged that the Biden administration "strong-armed banks into closing the accounts of crypto businesses and entrepreneurs, effectively blocking some money transfers to and from exchanges, and they weaponized government against the entire industry."

The Block reached out to the Federal Reserve for comment.