Fed's master account database underscores crypto's questions
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New data on Federal Reserve master account applications could show just how wary the Fed is of letting crypto into its club.
Why it matters: A Fed master account is the holy grail for crypto-touching firms to permit seamless transaction. But those firms argue there's no clear heuristic on who can get one, and who can't.
Context: The Federal Reserve Board has sought to reduce the mystery behind the master account approval process. In August, it made public a set of guidelines for its regional reserve banks to use when evaluating applications, particularly for a recent influx of applications from so-called "novel" banks.
- The guidelines are structured as a three-tiered framework with six risk-based principles. They clarify an original proposal that the level of reserve bank scrutiny would hinge on whether the institution was federally insured.
Driving the news: This month the Federal Reserve Board made public for the first time a database of master account holders and open applications at all 12 reserve banks.
- The disclosure was required by law — a provision in the annual defense bill by now-retired Sen. Patrick Toomey to hold the Federal Reserve Board accountable for how it grants master accounts.
By the numbers: Axios' review of the database shows there are 414 uninsured institutions that hold Fed master accounts, the vast majority of which were granted before the August guidance.
- For sure, not all uninsured firms are the same in the eyes of the Fed. Some of the hundreds of master account holders without federal deposit insurance have private share insurance, like credit unions, while other non-bank firms are subject to some other form of federal banking supervision.
- But there are some master account holders that are "truly uninsured," according to Julie Hill, a professor at the University of Alabama School of Law.
The big picture: That fact points to another reality — that most applicants touching on the crypto sector are subject to receive the strictest level of review.
- How crypto is treated in the master account approval process is comparable to how the reserve banks approach cannabis, said Hill, who has published research on the topic.
- "You might say crypto is riskier than sleepy banks in Oklahoma," she tells Axios, though the larger question might be, "Are they treating marijuana and crypto differently than other types of banks, and, if so, is that fair?"
Zoom in: Of the roughly two dozen firms that have requested access or had pending applications for master accounts since December 2022, a handful are crypto-facing firms that fit into the category of Tier 3 institutions.
- Kraken Financial, a custody unit of one of the oldest crypto exchanges, applied for one in October 2020 at the Kansas City Federal Reserve Bank, and its application remains "pending."
- BankWyse and Fnality — both mention digital assets on their websites — have applied within the last year, the former, via Kansas City, the latter, via New York.
- Medici Bank International, Protego Trust Bank and, of course, the recently rejected Custodia Bank also applied for one.
Reality check: Working against crypto-touching firms is language in the August guidance that granting a master account to an institution should not create risks to the stability of the U.S. financial system.
- And that's precisely what federal regulators believe banking the crypto industry does, as evidenced in a January bulletin to banks issued jointly by several agencies including the Federal Reserve Board.
The other side: The decision to allow or disallow master accounts to certain institutions is supposedly left to the individual discretion of any of the 12 reserve banks reviewing each particular applicant.
- That discretion, in contrast to the consistency in how the results of applications have borne out, is what the crypto industry is using as one piece of evidence that the U.S. wants to snuff out those businesses by cutting off access to crucial banking services.
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