Federal Reserve Policy Statement Restricts State Member Banks' Crypto Activities

The Federal Reserve Board issued a new policy statement, effective February 7, 2023, that restricts the permissible activities of state-chartered banks that are members of the Federal Reserve System, with a particular focus on crypto asset activities. Under the new framework, state member banks are limited to engaging only in activities that are permissible for national banks under OCC rules, effectively closing a regulatory gap that some fintechs and BaaS providers had sought to exploit through state charter partnerships. The policy also requires state member banks to demonstrate adequate risk management controls and obtain supervisory non-objection before engaging in novel crypto-related activities.

This applies to both insured and uninsured state member banks. The statement was issued alongside the denial of Custodia Bank's Fed membership application, reinforcing the coordinated regulatory tightening across federal agencies. For the BaaS ecosystem, this narrows the options for fintechs seeking to offer crypto-related services through partner bank arrangements using state-chartered institutions.

The combined effect with OCC and FDIC actions creates a substantially more restrictive environment for embedded crypto finance products.