Fed’s New Move on Crypto Bank Rules: Custodia Battle Resurfaces

The U.S. Federal Reserve has once again placed crypto banking regulation under the spotlight. 

In December 2025, the Fed voted to scrap its controversial 2023 crypto bank guidance, a policy introduced at the height of post-FTX regulatory pressure. 

While the central bank framed the move as a shift toward more flexible and tailored supervision, the decision has reignited debate around one of the most contentious cases in U.S. crypto banking history: Custodia Bank’s dispute with the Federal Reserve.

This development raises fresh questions about regulatory consistency, fairness, and what the Fed’s evolving stance means for crypto-focused banks operating in the United States.

What Was the 2023 Fed Crypto Bank Guidance?

The 2023 crypto regulation guidance was adopted in January of that year, following a wave of high-profile crypto collapses. Its core principle was simple but strict:

“Same activity, same risks, same regulation.”

Under this framework:

• Uninsured state member banks were treated almost identically to federally insured banks.
• Crypto-related activities faced heightened scrutiny and limitations.
• The guidance effectively narrowed the operating space for banks seeking to serve digital asset markets without FDIC insurance.

Critics argued that the policy blurred important distinctions between bank models and discouraged innovation in crypto banking.

Read Also: Ripple’s National Trust Bank Approval Could Reshape Crypto Banking

Fed’s Reversal: What Changed in 2025?

By rescinding the 2023 guidance, the Fed signaled a meaningful pivot in its approach to crypto oversight. The new framework emphasizes flexible supervision, allowing regulators to account for differences in:

• Bank structures
• Business models
• Risk profiles

Rather than imposing a one-size-fits-all standard, the Fed says it will now evaluate crypto-related activities on a more individualized basis while still prioritizing safety and financial stability.

This shift has been welcomed by some policymakers who believe overly rigid rules may push innovation offshore.

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Custodia Dispute Returns to Center Stage

The policy reversal has inevitably revived attention on the Custodia lawsuit with the Fed over crypto banking rules. 

Custodia Bank, a Wyoming-chartered digital asset bank, was denied access to the Federal Reserve System in January 2023—the same day the now-scrapped guidance was announced.

Custodia has long argued that:

• The Fed relied on guidance that was not yet finalized when rejecting its application.
• The decision reflected a predetermined effort to block crypto banks after the FTX collapse.

Founder and CEO Caitlin Long has maintained that the timing undermines the legitimacy of the denial and highlights procedural flaws within the regulatory process.

Read Also: Can Banks Afford to Embrace Crypto? Understanding the Capital Adequacy Ratio

Internal Fed Divisions Come Into Focus

The Fed’s December 2025 vote exposed clear internal disagreement. Governors Michelle Bowman and Christopher Waller supported scrapping the guidance, signaling concern that the prior framework was overly restrictive.

In contrast, Vice Chair for Supervision Michael Barr dissented. He warned that removing the guidance could:

• Undermine regulatory consistency
• Encourage “charter shopping,” where banks seek the least restrictive oversight

This split underscores broader uncertainty within U.S. regulators on how aggressively crypto banking should be constrained.

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What Does Fed’s Crypto Bank Guidance Scrap Mean for Custodia?

Officially, the Fed insists the policy change does not reopen past decisions, including Custodia’s application denial. 

However, in practical terms, the move strengthens Custodia’s narrative that its rejection was based on a regulatory stance the Fed has now abandoned.

While this does not guarantee legal relief, it may:

• Bolster Custodia’s position in public and legal discourse
• Increase pressure for clearer, more transparent crypto banking standards
• Influence future court interpretations of regulatory fairness

For crypto-friendly banks, the decision signals that regulatory attitudes are not fixed—and can shift with political and economic conditions.

Broader Implications for U.S. Crypto Banking

The Fed’s reversal may mark the beginning of a more nuanced era in U.S. crypto regulation. Instead of blanket restrictions, regulators appear more willing to balance innovation with risk management.

Still, uncertainty remains. Without clear, codified rules, crypto banks may continue to face uneven treatment depending on timing, leadership, and market conditions.

For now, the Custodia case stands as a cautionary tale of how fast-changing policy can reshape the future of crypto finance.

Read Also: Banks Free to Provide Bitcoin, Jerome Powell Says — What It Means for Banks and Bitcoin

Conclusion

The Fed’s decision to scrap its 2023 crypto bank guidance is more than a technical regulatory update—it is a symbolic shift that reopens unresolved questions about fairness, consistency, and accountability. 

As the Custodia dispute resurfaces, the episode highlights how regulatory reversals can echo long after decisions are made. Whether this change leads to meaningful reform or simply more debate will depend on how the new framework is applied in practice.

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FAQ

What is the Fed crypto bank guidance?

It is regulatory guidance outlining how banks engaged in crypto-related activities should be supervised by the Federal Reserve.

Why did the Fed scrap its 2023 crypto guidance?

The Fed said the rule was too rigid and replaced it with a more flexible supervision framework tailored to different bank structures.

What is the Custodia dispute with the Fed?

Custodia Bank sued the Federal Reserve after its application to join the Fed system was denied in January 2023.

Does the Fed’s reversal help Custodia’s case?

Legally, the Fed says it does not reopen past decisions, but it strengthens arguments that Custodia was judged under flawed guidance.

What does this mean for crypto banks in the U.S.?

It suggests future crypto banks may face more individualized oversight, but regulatory uncertainty remains.