Federal Reserve Withdraws 2023 Bank Innovation Policy

The U.S. Federal Reserve Board has formally withdrawn its 2023 policy statement governing how Board-supervised state member banks may engage in innovative activities, replacing it with a new policy framework designed to better accommodate responsible innovation while preserving financial stability & safety.

The move marks a significant recalibration of the Fed’s supervisory approach as emerging financial technologies, digital assets & new banking models continue to mature across the U.S. financial system.

• Why the Fed Changed Course
• What the 2023 Policy Did
• What the New 2025 Policy Does
• What This Means for Crypto, Tokenization, AI, & Payments

Why the Fed Changed Course

When the 2023 policy was published, regulators were navigating a period where “innovation” was heavily associated with crypto exposure, rapid-growth balance sheets, liquidity shocks, & operational fragility. Since then, the Fed says both the financial system & the Board’s understanding of innovative products & services have evolved.

Fed is also withdrawing supplementary material tied to the 2023 policy that discussed specific crypto-asset activities. That matters because it signals a shift away from policy language that implicitly “tags” crypto as a special case, toward a broader model where risk type matters more than tech label.

This entire policy debate is rooted in how the Fed uses its discretion under Section 9(13) of the FRA. In plain terms: state member banks have state-granted corporate powers, but the Board may limit their activities in a manner consistent with Section 24 of the Federal Deposit Insurance Act (FDIA).

Section 24 is the “guardrail clause” for insured state banks: it restricts an insured state bank from engaging as principal in activities not permissible for a national bank unless the FDIC determines the activity poses no significant risk to the Deposit Insurance Fund & the bank meets capital standards.

So the Fed is balancing three frameworks at once:

• what state law permits (state charter powers)
• what national banks can do (National Bank Act, OCC interpretations)
• what insured state banks can do beyond national banks (FDIC permissions under Section 24)

What the 2023 Policy Did

In 2023, the Fed published a statement that created a rebuttable presumption: Board-supervised state member banks should generally stick to activities permissible for national banks, subject to the same terms, conditions, & limitations that apply to national banks.

It also emphasized a critical supervisory point: legal permissibility isn’t sufficient. Banks also needed appropriate controls, information systems, risk management, & safety/soundness discipline, especially for “novel & unprecedented” activities.

That 2023 preamble went further, discussing how the policy could apply to specific crypto-asset fact patterns “at the time.” The Fed is now explicitly removing that crypto-specific material from the record.

What the New 2025 Policy Does

The 2025 policy statement replaces the 2023 framework with a more balanced approach that prioritizes transparency while creating room for responsible innovation by both insured and uninsured state member banks. Two core takeaways stand out.

1. First, the policy reaffirms baseline alignment with national bank permissions for insured state member banks. Insured institutions continue to operate within familiar boundaries shaped by national bank authorities and FDIC oversight.
2. Second, it introduces clearer and more structured guidance for uninsured state member banks and uninsured applicants seeking Federal Reserve membership who want to engage in activities not permissible for insured state member banks.

Most mainstream banks are insured, meaning FDIC deposit insurance plays a central role in how regulators assess risk. However, the Federal Reserve also supervises uninsured state member banks in specific contexts, creating a parallel supervisory track.

This distinction matters because deposit insurance fundamentally alters a bank’s systemic risk profile. Insured deposits can dampen run risk in certain scenarios, while uninsured funding models may introduce different vulnerabilities depending on balance sheet structure, liquidity buffers, and resolution preparedness.

The new policy explicitly recognizes this difference. Rather than forcing uninsured institutions into a one size fits all presumption, the Fed treats uninsured pathways as a separate analytical framework.

When evaluating requests to engage in activities not permissible for insured state member banks, the Board will assess whether the uninsured institution can operate in a manner consistent with safety and soundness and with preserving the stability of the U.S. financial system. To make this assessment, the Fed outlines several factors it may consider.

These include the regulatory framework governing the institution, the risks posed by the proposed activity and the bank’s planned internal controls, and how risks normally addressed through deposit insurance and FDIC resolution would be mitigated. Importantly, the policy offers concrete examples of what strong risk mitigation could look like.

This includes maintaining sufficient total loss absorbing capacity through capital and long term debt that is subordinated to deposits and other short term liabilities, or holding high quality liquid assets equal to the full value of demand deposits and short term obligations. In practical terms, the message is clear.

The policy’s interpretive foundation is anchored in a paired regulatory principle. The same activity presenting the same risks should be subject to the same regulatory framework.

Different activities presenting different risks should be subject to different regulatory treatment. This framing is subtle but significant.

It signals the Fed’s intent to avoid two recurring regulatory pitfalls.

1. The first is treating new technology as inherently risky simply because it is unfamiliar.
2. The second is allowing innovative wrappers to escape scrutiny when they replicate traditional banking risks in new technical forms.

What This Means for Crypto, Tokenization, AI, & Payments

By withdrawing the crypto specific supplementary material from the 2023 record, the Federal Reserve is deliberately de emphasizing crypto as a category within this interpretive framework. The shift signals that the Board no longer wants supervisory policy to hinge on whether an activity is labeled crypto, but rather on the nature of the underlying risks involved.

This does not mean crypto related risks have disappeared from supervisory consideration. Instead, it reflects a move toward an activity first, risk based lens, where custody, settlement, liquidity exposure, counterparty risk, and operational resilience are evaluated regardless of whether the rails are blockchain based or traditional.

For banks exploring tokenized deposits, tokenized assets, or programmable settlement mechanisms, the regulatory pathway becomes more structured under the new policy. The key questions now are straightforward.

Is the activity permissible for national banks. If not, has the FDIC authorized the activity for insured state chartered banks.

For uninsured state member banks, can the institution demonstrate sufficient run risk mitigation, balance sheet resilience, and credible resolution planning. Rather than closing doors, the Fed’s framework clarifies how permission can be earned, especially for institutions willing to meet higher standards of capital strength, liquidity coverage, and governance maturity.

AI driven underwriting, personalized financial offers, fraud detection, real time risk monitoring, and customer service automation are not explicitly addressed in the policy statement. However, the direction is clear.

Innovation is permissible so long as risk controls, explainability, governance, and supervisory transparency evolve in step with deployment. In effect, AI is treated not as an exception but as another operational layer subject to established principles of safety, soundness, and accountability.

This shift arrives at a moment when banking innovation is no longer confined to fintech startups. It has become core competitive infrastructure.

Banks are under sustained pressure to deliver faster and more reliable payments, stronger fraud prevention and monitoring, more efficient compliance and reporting workflows, modern digital first customer experiences, and new treasury and deposit products for digital native businesses. The Fed’s updated posture acknowledges a simple reality.

Innovation will continue. Supervision, therefore, must evolve from blocking unfamiliar activity to channeling it safely within the regulatory perimeter.

The Federal Reserve’s decision to withdraw its 2023 policy statement and replace it with a new 2025 framework marks a meaningful evolution in how U.S. banking supervision approaches innovation, particularly for Board supervised state member banks.

If you find any issues in this blog or notice any missing information, please feel free to reach out at yash@etherworld.co for clarifications or updates.

Related Articles

1. Polygon PoS Hard Fork
2. Polygon's L2 Solution
3. How to Use Polygon testnet?
4. Polygon announces to launch zKEVM mainnet beta
5. How Polygon is helping Blockchain Movement in India?