KC Federal Reserve Bank approves crypto bank access
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The Federal Reserve Bank of Kansas City now sits at the center of a national debate over whether crypto-focused banks should gain direct access to the U.S. banking system.
Why it matters: The KC Fed last week approved a limited, one-year Federal Reserve account for Wyoming-based Kraken Financial, placing this region's central bank in a dispute that has played out in courtrooms and boardrooms across the country.
Zoom in: The Federal Reserve operates the system that banks use to transfer money to one another.
- Financial institutions must have an account with a regional Federal Reserve bank to use it.
- The KC Fed approved a "limited purpose account" for Kraken Financial, a Wyoming-chartered bank affiliated with the crypto exchange Kraken.
- The approval lasts one year and includes restrictions tailored to the bank's business model and risk profile, the KC Fed said.
How it works: Not every institution automatically qualifies for a Federal Reserve account.
- In 2022, the Federal Reserve Board adopted guidelines creating three levels of review for applicants.
- Banks with federal deposit insurance go through a more streamlined process because they are already overseen by federal regulators.
Institutions involved in newer activities, including crypto-related banking, face more extensive review before approval.
- The KC Fed classified Kraken under the highest review tier before approving the limited account.
Zoom out: The question of who gets access to Federal Reserve accounts has intensified as digital asset firms seek a greater foothold in traditional banking.
- In December, the Federal Reserve Board requested public input on creating a more limited "payment account" for certain institutions.
What they're saying: "As we know, the payments landscape is actively evolving," KC Fed president Jeff Schmid said in the release announcing the approval. "Throughout this transformation, the integrity and stability of the U.S. payments system remain our priority."
- Kraken said the approval allows it to connect directly to Federal Reserve services, such as Fedwire, rather than routing certain transfers through intermediary banks.
The other side: The Bank Policy Institute, which represents large U.S. banks, said it is "deeply concerned" and criticized what it described as a lack of transparency around the approval and the risk controls imposed.
The bottom line: KC's Federal Reserve Bank is a test case for how crypto-related firms can plug into the traditional banking system, putting the region at the center of a national policy debate.