EDITOR'S NOTE: Two major crypto fintech institutions—Custodia and Kraken Bank—are on their way to receiving approval for master accounts with the Federal Reserve (according to its published guidance). If you’re not familiar with either bank, Custodia bridges digital assets and the dollar payment system while serving as a digital asset custodian. Kraken Bank, on the other hand, is a subsidiary of the crypto exchange by the same name. Both banks received routing numbers and are on the path to acquiring Tier 3 status. This would open up several opportunities for both banks, much of which are discussed below. Tier 3 would allow Custodia and Kraken to participate in the global payment system, essentially becoming crypto merchant banks, placing them in an extremely competitive position relative to their industry competitors. Why is the Fed legitimizing fintech companies whose assets are not only highly speculative but questionable in terms of value? Hopefully, we’ll gain some insight into this seemingly strange development in the coming weeks.
The central bank will create a three-tiered system for evaluating whether a financial institution should have access.
The U.S. Federal Reserve said Monday the central bank is publishing its final guidance for novel financial institutions to access its "master accounts," something these firms need to participate in the global payment system.
Monday's announcement would seemingly move the U.S. central bank one step closer to possibly allowing Wyoming special purpose depository institutions (SPDI), like Custodia (formerly Avanti) and Kraken Bank, access to these accounts so they would not need intermediary banks. The Fed first proposed guidance last year, opening up a request-for-comment process. Nearly 300 respondents filed comments, leading to a second public feedback process earlier this year.
In a statement, Fed Vice Chair Lael Brainard said, "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."
The guidance is largely similar to what was first proposed in 2021, and will create a multi-tiered system allowing the Fed to adapt its evaluation process for granting access depending on what kind of financial institution is applying. Each tier corresponds to a respectively more stringent review process.
Under the guidance, Tier 1 banks would be federally insured. Tier 2 banks would not be federally insured but are still "subject to prudential supervision by a federal banking agency."
The third tier consists of firms that are "not federally insured and not subject to prudential supervision by a federal banking agency," which would most likely apply to the Wyoming crypto banks.
According to a statement published with the guidance and press release, the Fed received comments after publishing both its initial proposed guidance in 2021 and its updated guidance earlier this year. Many of these commenters filed a form letter but the Fed appears to have received a hair under 70 unique responses.
"Many commenters, on the other hand, recommended that the Proposed Guidelines should provide a more challenging path for institutions with novel charters to gain access to accounts and services. Many of these commenters argued that the Proposed Guidelines should subject non-federally insured institutions to the same types of requirements as apply to federally insured depository institutions, regardless of the institution’s business model," the document said.
Custodia and Kraken both applied for master account access in 2021, shortly before the Fed published its initial proposal.
David Kinitsky, the CEO of Kraken Bank, told CoinDesk at the time that the proposal was a positive step for his company.
“There's nothing novel in terms of the factors that they're including here. It's exactly the type of things that the Federal Reserve is looking at, in terms of risk to the reserve itself, risk to the payment system [and] risk to the economy," he said.
Still, Custodia sued the Fed in June on allegations of violating a mandatory one-year deadline in deciding whether to grant the Wyoming firm access or not.
UPDATE (Aug. 15, 2022, 19:30 UTC): Adds additional context.
Originally published on Coin Desk.