US Fed Opens the Door for Crypto Banks to Access Master Accounts

Cryptocurrency regulations have been a long-standing topic of dispute in the United States for quite a while. There has been some progress in crypto regulations in the US despite stalling the issue on the broader world scale.

This week, another milestone was achieved on the regulation front. The US Federal Reserve has provided guidance to cryptocurrency banks in the country looking to play larger roles in the broader financial system.

Different Strokes for Different Banks

Earlier this week, the Federal Reserve published a statement outlining a possible pathway for cryptocurrency banks to enter into the traditional financial system and operate without intermediaries. In its statement, the financial watchdog confirmed that it had finalised the guidelines for determining whether these crypto banks could apply for Federal Reserve accounts and payment services. They also confirmed that the guidelines would take effect as soon as they are published in the Federal Register.

The Fed’s guidelines have led to a three-tiered system for determining whether banks will obtain approval to operate. As part of the final draft, institutions with novel financial products can access the Fed’s “master accounts”. The US Federal Reserve believes the process will ensure a safe, inclusive, and innovative financial system for the United States.

The systemic framework serves primarily as a guide for evaluating the potential risk of the applicant institutions in question. In the case of Tier 1, the US Fed will categorise applicants with cover from the Federal Deposit Insurance Corporation (FDIC). In the case of Tier 2, the Fed will consider applicants without FDIC cover but subject to “prudential supervision by a federal banking agency”.

On the other hand, Tier 3 applicants are described as institutions not insured by the federal government and not subject to prudential oversight by a federal banking regulator. This is where several crypto banks that already have access to operate in states like Wyoming – including Kraken and Custodia – are expected to operate. And they will be subject to more scrutiny in their application processes.

A Small Step, But More Work to Be Done

Approval from the US Fed will mean that crypto banks will no longer need partnerships with traditional banking intermediaries when entering the traditional financial space. Third parties and intermediaries will also be sidelined, with crypto banks now able to access the Fed’s “master accounts” and serve dual functions.

Interestingly, the 49-page guideline only mentions the word “cryptocurrency” once. The Federal Reserve opted to refer to crypto banks as institutions that engage in innovative activities and for which authorities are currently creating suitable supervisory and regulatory frameworks. However, there is no doubt that the US Fed was referencing these crypto banks in its guidelines.

Despite the excitement over these guidelines and what they mean for the industry, some have already cautioned that they might not necessarily bring the type of speedy approval that some crypto enthusiasts believe. In a statement released following the guidelines, Federal Reserve Bank governor Michelle Bowman warned that the guidelines are simply the first step in the Fed’s goal of providing a broader, more transparent process that will ultimately lead to a more inclusive financial system.

Still, Bowman quickly pointed out that the guidelines don’t mean that crypto banks’ review processes would now be expedited. The major regulation problem remains: banks in the industry shouldn’t expect to simply gain access to the US Fed’s master accounts just because they pass some approval yardsticks.

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