U.S. Federal Deposit Insurance Corporation (FDIC) May Follow the Office of the Comptroller of the Currency (OCC) in Removing “Reputational Risk” as a Consideration in Banking Regulation
This has been termed a “huge victory for the cryptocurrency industry” by David Sacks, a prominent figure in both cryptocurrency and artificial intelligence. So, what exactly is going on?
(Background: The U.S. Federal Deposit Insurance Corporation (FDIC) will modify and eliminate the “crypto discrimination policy,” acting as if banks should not be barred from engaging with blockchain.)
(Context: Trump is reportedly considering the merger of the FDIC and the OCC, which would weaken banking regulatory power.)
In the U.S., the cryptocurrency industry has long stood on the fringes of the financial world, yearning for mainstream recognition but often blocked by an invisible wall called “reputational risk.” For years, American banks have been cautious in dealing with cryptocurrency companies, fearing they might cross the regulatory red line. However, recently, the official account of the Republican side of the U.S. Senate Banking Committee indicated that the FDIC may follow the OCC’s lead and remove “reputational risk” as a consideration in banking regulation. This has been hailed as a “huge victory for the crypto industry.” What does this mean? What changes might it bring to the cryptocurrency sector? And what does it signify for industry participants?
1. Reputational Risk: The “Shackles” Between Banks and Cryptocurrency
To understand the significance of this matter, we first need to discuss what “reputational risk” is. Simply put, reputational risk refers to the risk that a bank’s reputation may be harmed due to certain business dealings or behaviors. For instance, if a bank associates with a highly controversial industry, customers may flee, public opinion may sour, and even lawsuits may ensue. This kind of risk seems reasonable, after all, who wouldn’t want to protect their good reputation? However, in practice, this standard has become vague and subjective.
U.S. regulatory agencies have defined reputational risk as “negative publicity regarding an institution’s business practices (whether true or not), which may result in reduced customers, legal entanglements, or decreased revenue.” You see, this definition is broad enough to encompass anything. As a result, regulatory bodies have used this vague definition to interfere with banks’ business decisions. Especially in the cryptocurrency sector, reputational risk has become an invisible “shackle.” Many banks fear that collaborating with cryptocurrency companies would be deemed “risky” by regulators, leading them to shut their doors entirely, even refusing to open accounts.
For example, prominent cryptocurrency firms like Coinbase have publicly complained about how difficult it is to find a bank willing to work with them in the U.S. Sometimes, they are even forced to seek banking services overseas. This phenomenon has garnered a rather unflattering nickname within the industry—”Operation Chokepoint 2.0,” which implies a form of financial regulation that effectively chokes the cryptocurrency sector.
2. Policy Easing: A New Dawn for the Cryptocurrency Industry?
Just as the cryptocurrency industry struggled, a turning point began to emerge. The FDIC plans to follow the OCC in eliminating “reputational risk” as a banking regulatory factor. If this becomes a reality, it would mean that banks had largely refused to work with cryptocurrency companies due to the fear of regulatory troubles. With this “trouble” gone, banks could collaborate with cryptocurrency firms more freely. Imagine if you were the owner of a cryptocurrency company, previously running around trying to find a bank willing to open an account for you, and now the situation has changed—you can finally breathe a sigh of relief and focus on your business instead of begging for help!
More importantly, this is not just a minor shift by a single agency but a signal of a change in the U.S. financial regulatory climate. U.S. Senator Tim Scott has also proposed a bill called the Financial Institutions Risk Management Act (FIRM Act), aimed at thoroughly restricting regulatory agencies from using reputational risk to pressure banks. Taken together, these actions suggest that the U.S. government may be shifting from an overly stringent approach to one that allows for more leeway, recognizing that the cryptocurrency industry is a legitimate economic sector.
3. Industry Perspective: Calm Reflection Amidst the Cheers
In an interview, the CEO of Bitwise stated, “This is a great thing for us, as collaborating with banks will become easier and operational costs can be reduced.” Many industry participants feel that with the removal of the “reputational risk” hurdle, cryptocurrency companies can finally catch their breath and focus on innovation and market competition.
However, while there is much cheer, not everyone believes that everything is entirely positive. Aiying notes that a bank’s willingness to cooperate depends not only on regulatory policies but also on their own capabilities regarding compliance and anti-money laundering control. Most companies still struggle in this regard, or their weaknesses are instinctual, as being too strong may limit their business opportunities. Therefore, it is only natural for banks to be wary of associating with cryptocurrency companies.
4. Conclusion: The First Step Towards Maturity
The FDIC’s decision to eliminate “reputational risk” as a regulatory factor marks a significant milestone for the cryptocurrency industry. It removes a major barrier to collaboration between banks and cryptocurrency companies and indicates a subtle shift in the U.S. stance towards cryptocurrency. As David Sacks stated, this is a “huge victory.” However, while this victory is significant, the cryptocurrency industry must not rely solely on policy loosening to establish itself. Technology must keep pace, compliance must be executed well, and public trust must be gradually built.
The road ahead is still long, but at least now, the cryptocurrency industry has a glimmer of hope. Perhaps in a few years, when we look back, we will realize that this change was not just a minor episode but the starting point for cryptocurrency to enter mainstream finance.
