Federal Reserve guidelines open the banking system to crypto banks

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

Why is this important: The guidelines aim to clarify a long-standing question critical to the crypto industry – who is allowed to have a main account. Such accounts would allow crypto banks and fintech platforms to access central bank rails (payments and services) without partnering with a traditional bank.

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

  • Their response is expected on Tuesday, August 16.

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

  • Sen. Pat Toomey (R-Pa.) sent a letter in June ask about the Colorado Reserve Trust fintech company, which was given a lead account that was later revoked.
  • When the guidelines were first proposed, the usual comment period drew an outsized response — 46 individual comment letters and 281 duplicate form letters — which are generally two buckets, the Fed says — for and against.
  • A cryptography bill proposed by Senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (DN.Y.) included a provision that would allow any depository institution with a state charter to have an account at the Federal Reserve, a detail that struck a nerve with the banks.

What they say“The new guidelines provide a consistent and transparent process for evaluating applications for Federal Reserve accounts and access to payment services to support a safe, inclusive, and innovative payments system,” said the vice president of Federal Reserve, 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.

  • Guiding lines originally proposed include six principles for Reserve Banks to assess master account applications, otherwise each application will be considered on a case-by-case basis.

The bottom line: The Federal Reserve Board does not specifically state what to do for specific charters, but rather establishes levels indicating the level of control an entity at that level can expect.

  • For those in the third tier – those who are not federally insured and not subject to the supervision of a federal bank agency – the level of control described is “the highest”.

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