In a major piece of crypto news, it was announced that the Federal Reserve will be directing its supervisors to remove “reputational risk” from its checklist for examining banks. This metric had been a focal point when it came to complaints from cryptocurrency insiders.
The Fed stated that it would be removing references to those risks from its supervisory manuals and any other related documents. It is also directing its examiners to focus more specifically on financial risks. Reputational risk had previously been defined as the potential for negative publicity to lead to costly litigation or hurt a bank’s business.
Fed Joining Other Agencies with Move
The Federal Reserve will review and remove references to reputational and reputation risk from supervisory materials, which include examination materials. This move by the Fed sees them join the Federal Deposit Insurance Corp and Office of the Comptroller of the Currency when it comes to scrubbing this kind of language from their overall verbiage.
Travis Hill, the Acting Chair of the FDIC, said in March that the agency had completed a review of all mentions relating to reputational risk, plus any similar terms within its policy documents. He also made note that the firm expected to “eradicate this concept from our regulatory approach.”
“While a bank’s reputation is critically important, most activities that could threaten a bank’s reputation do so through traditional risk channels (e.g., credit risk, market risk, etc.) that supervisors already focus on,” Hill said in a statement. “Meanwhile, ‘reputational risk’ has been abused in the past, and adds no value from a safety and soundness perspective as a standalone risk.”
A Push from Lawmakers
The move isn’t exactly surprising given the fact that Republican lawmakers have been behind the push to remove reputational risk as a potential regulatory flag. Lawmakers have argued that this risk had led some institutions to de-bank companies and individuals that have a conservative leaning perspective.
President Donald Trump added fuel to the fire when he made accusations that JPMorgan Chase and Bank of America were debanking conservatives during his appearance in Davos, Switzerland for the World Economic Forum. Both banks have denied those claims.
This narrative led legislation in both the House and Senate, ultimately aimed at removing reputational risk as a factor that regulators would use to identify the soundness and gauge the safety of banks.
The Fed noted that it would replace those references to reputational risk with “more specific discussions of financial risk.” Examiners for the central bank will be retrained in an effort to “help ensure this change is implemented consistently across Board-supervised banks and will work with other federal bank regulatory agencies to promote consistent practices, as necessary.”
CEO of the American Bankers Association Rob Nichols said, “We have long believed banks should be able to make business decisions based on prudent risk management and the free market, not the individual perspectives of regulators. This change will make the supervisory process more transparent and consistent while enabling banks to better meet the needs of their customers, clients and communities.”
Wallstreet Meets Web3
Traditionally, reputational risk has been meant as a catch-all justification that regulators would scrutinize and even penalize banks that had dealings with industries that were deemed controversial. This included things like crypto firms, payday lenders, and cannabis businesses. Removing this factor, however, means that the Fed is shifting to a risk-based supervision from a values-based supervision. This is all grounded in consumer protection and financial stability.
In a press release, the Fed said, “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 management practices.”
This is more than simply removing a major hurdle. If anything, this move coincides with a major surge of interest by banks and credit unions to offer financial products considered to be digital-first. With today’s end users wanting borderless money transfers, access to digital assets, and faster payments, banks have to act in order to stay at the forefront of business.
Smaller lenders aren’t standing still when it comes to innovation, but the trend remains one that is being pursued cautiously. After all, cryptocurrency remains a volatile marketplace, cyber threats continue to evolve, and the regulatory landscape is far from a certainty. Banks wishing to enter the space need a clear strategy or it could cost them. Crypto in 2025 is about compliance, risk management, and infrastructure more than hype.
A major challenge for banking institutions is their own internal capabilities. A move into the crypto space means hiring compliance officers that are blockchain-savvy, forging partnerships with firms that are considered crypto-native, and building secure custody solutions, all of which come at a high cost.
Banks are trying to find a middle ground between aggressive action and being left behind. With crypto-native firms taking a large chunk of the market share thanks to brand loyalty, compliant pathways, and a robust infrastructure, banks are being forced to embrace partnerships, compete in trust and security, and lead with innovation.
Big Investors Increasing Crypto Holdings
Though crypto is still seen as a volatile asset, it is becoming less so in the eyes of traditional investors. A large part of this has to do with broader adoption by traditional institutions and banks. The more that adopt cryptocurrencies like Bitcoin, the more stable an investment it becomes.
Though there is an ongoing debate as to the real worth of these digital assets, it is clear to see that institutional investors are moving in that direction. More than 350 investors surveyed said that they planned to increase digital asset allocation over the course of 2025, with 60% of those saying they planned to allocate 5% of their total assets to cryptocurrencies.
Crypto Regulations Shifting
A lot of this has to do with a pro-crypto movement, particularly by the current President of the United States. President Donald Trump announced the creation of a crypto currency Federal Reserve, and his regime has been largely pro-crypto since taking office.
The move has galvanized institutional investors to begin stockpiling crypto assets like Bitcoin, Ethereum, and others. Speculators feel that the market is more resilient and mature than it has been in years. The addition of exchange-traded products from Ethereum, Bitcoin, and others has also made investing in cryptocurrencies more accessible and attractive than it had been previously.
As barriers for inclusion continue to be worn down, crypto has had a far more positive outlook than in recent years. As large institutional investors continue to join the fray, it only builds further confidence in both Bitcoin and altcoins as viable investments.
With the Federal Reserve making this move, it is just one of many favorable steps in the direction of a pro-crypto landscape. What this move will mean in the long term remains to be seen but it has to be a positive for crypto investors.
