Sen. Tim Scott introduces bill to block use of reputational risk amid crypto debanking concerns

Senate Banking Committee Chair Tim Scott released a bill that would block regulations from using reputational risk to supervise banks. This follows the crypto industry's condemnation of government agencies they say are cutting them off from the financial sector.

The South Carolina Republican introduced a bill responding to that concern on Thursday and said his legislation would "curtail the weaponization of federal banking agencies by eliminating the ability for regulators to use reputational risk as a component of supervision," according to a statement.

The bill addresses other reputational risks including "disfavored political groups." The Federal Reserve defines reputational risk as the "potential that negative publicity regarding an institution's business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions." 

"It’s clear that federal regulators have abused reputational risk by carrying out a political agenda against federally legal businesses," Scott said in a statement on Thursday. "This legislation, which eliminates all references to reputational risk in regulatory supervision, is the first step in ending debanking once and for all."

The bill, called the Financial Integrity and Regulation Management Act, has several Republican sponsors including Sens. Mike Crapo, Cynthia Lummis, Katie Britt and Bernie Moreno. The Wall Street Journal first reported the news Thursday morning. 

Crypto debanking has become a hot topic among some lawmakers and the digital asset industry over the past few months amid increased criticism from crypto firms who say they face challenges when looking to establish and maintain bank accounts in the U.S.

The bill calls for eliminating references to reputational risk "as a measure to determine the safety and soundness of regulated depository institutions" and ensuring that federal banking agencies can't use reputational risk in new rules or guidance. 

According to a Senate Banking Committee spokesperson, the bill has support from the American Bankers Association, the Blockchain Association, and the Bank Policy Institute. 

Operation Choke Point

Castle Island Ventures co-founder Nic Carter coined the phrase "Operation Choke Point 2.0" in 2023, comparing it to Operation Choke Point 1.0, a 2013 U.S. Department of Justice Initiative that sought to limit banking services for industries considered high-risk for fraud and money laundering, including payday lenders and firearm dealers. 

Meanwhile, bank executives such as JPMorgan Chase CEO Jamie Dimon have said that banks are at risk of paying millions of dollars in fines if something goes wrong. 

Fed Chair Jerome Powell has said it was time to "take a fresh look" at debanking.

"I will commit to working with you on that, we do try to avoid excessive burden," Powell said in February during a Senate Banking Committee hearing. "Look, I think it's fair to take a fresh look, frankly, on debanking."