Fed set a common crypto boundary for state member banks

The Federal Reserve Board issued a policy statement on January 27, 2023 that set a common boundary for insured and uninsured state member banks seeking to conduct crypto-asset activities. The Board established a rebuttable presumption that those banks, when acting as principal, would be limited to activities permitted for national banks and would have to follow the same conditions imposed by the Office of the Comptroller of the Currency.

The action mattered beyond one applicant. It narrowed the argument that a permissive state charter or the absence of federal deposit insurance could give a bank wider crypto powers after it entered the Federal Reserve System. The statement was not a congressional stablecoin law and did not ban bank custody of crypto assets. It was a supervisory interpretation of section 9(13) of the Federal Reserve Act, announced on January 27 and scheduled to become effective upon publication in the Federal Register.

A presumption against charter arbitrage

Under the statement, a state member bank could not assume that authority granted by its home state was enough. If an activity was not permissible for a national bank, and no federal statute or Federal Deposit Insurance Corporation rule permitted it for state banks, the institution would need prior Board permission. The Board said it would presume against approval unless the bank showed a clear and compelling reason for different treatment and robust plans to manage the risks.

Even legal permissibility would not be sufficient. The Fed said state member banks needed controls and information systems proportionate to liquidity, credit, market, operational, cybersecurity and compliance risks. Where the OCC required a national bank to obtain a written supervisory nonobjection before beginning an activity, a state member bank would need the equivalent from Federal Reserve supervisors.

The policy aimed at the gap between state-created banking powers and federal membership conditions, reducing the prospect that crypto firms could select a charter mainly to escape activity limits applied elsewhere.

What the statement said about crypto

The Board said it had not identified authority for national banks to hold most crypto assets, including bitcoin and ether, as principal. It therefore said state member banks would be presumptively prohibited from doing so. That finding concerned bank balance-sheet holdings as principal; it was not a prohibition on customers owning those assets.

Dollar-token issuance received a narrower path. A state member bank would have to satisfy conditions already placed on national banks, demonstrate adequate controls and obtain a supervisory nonobjection. The Fed also said issuing tokens on open, public or decentralized networks was highly likely to conflict with safe and sound banking practices, citing operational, cybersecurity, run and illicit-finance risks, especially when a bank could not identify all transacting parties.

Crypto custody remained possible. The statement expressly said it did not prohibit safekeeping services conducted in a custodial capacity when performed safely and in compliance with consumer-protection, anti-money-laundering and anti-terrorist-financing laws.

Custodia made the policy concrete

Also on January 27, the Board denied Custodia Bank’s application to become a Federal Reserve member. Custodia was a Wyoming-chartered special purpose depository institution without federal deposit insurance. The Fed’s event-day release said its proposed model included issuing a crypto asset on open, public or decentralized networks and that its risk-management framework was insufficient for the risks identified by the Board.

That announcement addressed membership, not a final resolution of every question concerning a Federal Reserve master account. The Board did not publish its full order on January 27; it said the order would follow after confidential information was reviewed. Custodia disputed the assessment in a statement reported by the Associated Press and said it would continue litigation. Those were opposing contemporaneous positions, not findings that the short public release could independently resolve.

A wider federal signal

The White House separately published a crypto-risk roadmap on January 27. It encouraged regulators to limit financial institutions’ exposure, asked Congress for stronger customer-asset, disclosure and illicit-finance authorities, and warned against deepening ties between crypto markets and institutions such as pension funds. Read together, the White House statement and the Fed’s actions signaled a post-2022 preference for containing crypto risks at the banking perimeter while leaving a conditional route for custody and some payment-token activity.

No event-day price, volume or on-chain claim is made. The significance was regulatory: the Fed converted a general concern about crypto banking into a charter-neutral presumption and activity-specific supervisory gates.

Later record

The Board published its detailed Custodia order on March 24, 2023. That later document can clarify the institution-specific reasoning, but it was not available on January 27 and is not used here to expand what the event-day public record established.