Up until now, American financial institutions that wanted to conduct both crypto transactions and traditional banking services have had to pick a lane.
The Federal Reserve released formal guidelines this afternoon to oversee the process by which “institutions offering new types of financial products or with novel charters” could be granted so-called “master accounts,” a key financial status that allows for direct payments with, and access to, the Fed. All federally-chartered banks possess a master account.
The Fed’s 49-page ‘Final Guidance’ mentions the word “cryptocurrency” only once, when discussing the sort of novel institutions that may seek master accounts under these guidelines. But the subtext of today’s announcement is inextricably linked to the crypto industry.
Custodia, a crypto bank founded by former Morgan Stanley managing director Caitlin Long, sued the Federal Reserve in June, citing a 19-month delay in the Fed’s processing of the bank’s application for a master account. The Fed’s application paperwork for a master account cites a typical turnaround time of five to seven business days.
The delay is likely due to the Fed’s uncertainty over how to grant traditional banking powers to crypto-native institutions like Custodia and Kraken, which has also yet to hear back about its master account application. In January, Federal Reserve Chairman Jerome Powell chalked up the delay to the “hugely precedential” nature of such a decision.
The Fed is hopeful, though, that today’s guidelines will help streamline the application review process for “novel” institutions like Custodia and Kraken.
“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,” Fed vice chair Lael Brainard said in a statement.
The guidelines set up a tiered framework that organizes applicant institutions based on their apparent risk level. Tier 1 would consist of federally-insured applicants, and Tier 2 includes institutions that are not federally-insured but are still “subject to federal prudential supervision.”
Tier 3 includes institutions that are neither federally insured nor subject to prudential supervision, but rather subject to “a supervisory or regulatory framework that is substantially different from, and possibly weaker than… federally insured institutions.”
Custodia, Kraken, and other similar crypto banks would likely fall into Tier 3.
Such a tiered system is largely consistent with language first proposed—but not adopted—by the Fed in 2021.
Despite creating a master account application framework that appears to incorporate crypto companies, the Fed also signaled caution over reading too far into the announcement.
When addressing the potential that these guidelines could expand services to novel institutions “that pose high levels of risk,” the Fed made sure to note that they “do not establish legal eligibility standards but instead establish a risk-focused framework for evaluating access requests from legally eligible institutions under federal law.”