Aug 15, 2022 - Economy

Federal Reserve guidelines crack banking system open to crypto banks

Illustration of the Marriner S. Eccles Federal Reserve Board Building against a backdrop of pixelated coins.

Illustration: Shoshana Gordon/Axios

The Federal Reserve Board on Monday announced final guidelines that could open up a path for institutions peddling new types of financial products, or those with novel charters, to tap into the banking system.

Why it matters: The guidelines seek to clarify a longstanding question critical to the crypto industry — who is allowed to have a master account. Such accounts would allow crypto banks and fintech platforms to access the central bank's rails (payments and services) without partnering with a traditional bank.

Of note: Wyoming-based Custodia Bank sued the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City in June for what it called "Kafkaesque" delays to its application for one.

  • Their response is due Tuesday, August 16.

The big picture: There has been a pressure cooker of activity as of late related to the issue of master accounts.

  • Sen. Pat Toomey (R-Pa.) sent a letter in June asking about Colorado fintech firm Reserve Trust, which received a master account that was later revoked.
  • When the guidelines were first proposed, the customary comment period drew an outsized response — 46 individual comment letters and 281 duplicate form letters — that generally fit two buckets, according to the Fed — for and against.
  • A crypto bill proposed by Senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) included a provision that would entitle any depositary institution with a state charter to an account at the Federal Reserve, a detail that struck a nerve with banks.

What they're saying: "The new guidelines provide a consistent and transparent process to evaluate requests for Federal Reserve accounts and access to payment services in order to support a safe, inclusive, and innovative payment system," Federal Reserve Vice Chair Lael Brainard in a statement.

Details: The new guidelines include a tiered review framework that Reserve Banks will apply to different types of institutions with varying degrees of risk, according to a statement.

  • The guidelines originally proposed include six principles for Reserve Banks to evaluate requests for master accounts, otherwise each application will be considered on a case-by-case basis.

The bottom line: The Federal Reserve Board doesn't specifically lay out what to do for specific charters, rather, they establish tiers indicating the level of scrutiny an entity in that tier can expect.

  • For those in the third tier — those not federally insured and not subject to supervision by a federal banking agency — the level of scrutiny described is "highest."
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