US Fed Ends Use of 'Reputational Risk' in Crypto Banking Oversight

The crypto sector has long claimed that the US Federal Reserve unjustly targets and debanks crypto enterprises due to its consideration of “reputational risk” in its supervision of banks. However, the Fed has now instructed its supervisors to stop doing so.

More than 30 US technology and crypto firms were refused banking services as part of Operation Chokepoint 2.0. That was driven by the difficulty in establishing or keeping banking partnerships in industries considered dangerous.

Major Boost for Crypto Sector

According to a statement released on Monday by the Federal Reserve Board, the board has begun the process of revising its supervisory materials. In order to replace any mentions of reputation or reputational risk with “specific discussions” centered on financial risk.

In addition to coordinating with other federal bank regulatory bodies to encourage uniform procedures, the board intends to educate examiners. And make sure the adjustment is uniformly applied to all banks it oversees.

Moreover, in spite of the shift, the Federal Reserve Board has made it clear that it expects banks to adhere to all applicable rules and regulations in their risk management practices. There will be no effect on the notion of reputational risk. In their own risk management practices at banks supervised by the Board.

Reputational risk was described by the Federal Reserve as the possibility that unfavorable press about a company’s operations. Whether based on fact or fiction, might lead to a drop in customers, expensive lawsuits, or less money coming in.

Nevertheless, naysayers said that doing away with reputational risk might mask non-financial concerns. Also, affect the stability of banks, reduce supervision, and encourage riskier banking practices.

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