US Federal Reserve Drops ‘Reputational Risk’ Requirements for Banks, Ending Era of Crypto Debanking

The US Federal Reserve announced that it will no longer use ‘reputation risk’ to assess banks, ending a practice closely connected to the ‘war on crypto’ and debanking. Reputation risk was used to pressure US banks to reject crypto startups from receiving banking services such as business loans. The status quo has changed in Washington, giving banks the autonomy to make their risk assessments. The Federal Reserve announced that they were combing through their documentation to replace the term ‘reputation risk’ with more specific examples of ‘financial risk’. The Federal Reserve added that they were still committed to risk assessment and desired banks to follow sound principles. 

The Fed defined reputational risk as including aspects of negative publicity that hurt a business’s bottom line or lead to costly litigation procedures. The Fed has now removed the term from its documents and training manuals, focusing on more specific types of risk instead. The Office of the Comptroller and the Federal Deposit Insurance Corporation both dropped ‘reputational risk’ as an item of assessment. Banks have long disputed the measure as introducing subjective metrics that can be abused by federal organisations and can lead to inaccurate assessments of what could otherwise be legitimate investments. The Fed still expects banks to conduct responsible risk assessment examinations. Banks can still employ ‘reputation risk’ assessments if they believe the methods are valid. 

Banks are still expected to use robust risk management methods. The Federal Reserve still sees risk assessment as a vital methodology that prevents financial crises from happening. The crypto industry is set to benefit from the new developments because ‘reputation risk’ was used to bludgeon the industry into submission. The Fed has decided instead to focus on sound risk assessment methods rather than methods that prioritise risk perceptions. Banks can now focus on hard data and statistics to judge crypto partnerships, rather than concentrating on vibes and social media trends. Crypto businesses may thrive under these new conditions because they can take out more loans and take measured risks in their business practices. Crypto startups can enjoy traditional banking services when exploring new ways to make money from blockchain innovations. 

The central bank is under incredible pressure from the Trump administration to get the economy back on track. Under the previous administration, the Fed had to micromanage the banking industry based on subjective measures that were hard to implement. The result was a ‘war against crypto’ and discriminatory practices against entire swathes of the US economy. Under President Trump, banks can now decide whether subjective reputation measures are appropriate on a case-by-case basis. President Trump has taken an aggressive stance against the Fed, calling the chairman a “moron” and demanding that the central bank comply with his wishes. Trump and Chairman Jerome Powell met in the Oval Office. Trump insisted that Powell reduce interest rates from over 4% to 1% so that he could finance US debt at a cheaper rate. Powell has defended the actions of the Fed by stating that the central bank also wants to support a strong US economy. Meanwhile, Trump has said that he will blame Powell for any future economic crises after his decisions. 

TradFi and the broader cryptocurrency market will benefit from surviving the debanking era, which thwarted the industry’s efforts to scale crypto tokens. Banks can assess crypto projects more objectively and have a better chance of profiting from US innovations. Many banks are already interested in crypto projects and will benefit from the changes immediately. Web3 innovations are taking off recently and will benefit from the changes, especially because many traditional institutions may not have the technical expertise to understand these new technologies. Operation Choke Point was part of the debanking movement to destroy crypto startups. However, Bitcoin was designed to withstand American corruption, especially about machinations from the central bank and public-private corruption in the banking industry. Despite efforts by specific organisations, cryptocurrencies survived a turbulent time and became more robust.