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Federal Reserve could allow crypto banks to function for the blockchain and traditional systems

The Feds release announcement that could connect crypto and traditional bank systems

Image source: Getty Images

Crypto transactions and traditional bank services in the United States have always functioned as separate entities for more than a decade.

However, there has been a shift in the winds as the Federal Reserve released an announcement regarding the situation.

The announcement

On Tuesday afternoon, the Federal Reserve released formal guidelines that oversee the process wherein “institutions offering new types of financial products or with novel charters” could be granted “master accounts.”

The master account provides a key financial status allowing direct payments with (and access to) the Fed – federally-chartered banks possess a master account.

They released a 49-page ‘Final Guidance,’ which raises the word “cryptocurrency” once in discussing the sort of novel institutions that seek master accounts under such guidelines.

However, the subtext of the announcement shows a link to the crypto industry.

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Uncertainty over crypto-native institutions

In June, Custodia sued the Federal Reserve for a 19-month delay in the processing of the bank’s application for a master account.

Custodia is a crypto bank that is founded by Caitlin Long, a former Morgan Stanley managing director.

The Fed’s application paperwork for a master account has a typical turnaround time of five to seven business days.

The delay can be attributed to the Fed’s uncertainty on how to give crypto-native institutions like Custodia and Kraken traditional banking powers.

Kraken is another crypto bank that is yet to hear about its master account application.

Earlier in January, Federal Reserve Chairman Jerome Powell attributed the delay to the “hugely precedential” nature of the decision.

The guideline

The Fed hopes that the guidelines will help streamline the application process for institutions like Custodia and Kraken.

Fed vice chair Lael Brainard released a statement, saying:

“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 guidelines create a tiered framework organizing applicant institutions based on their apparent risk level.

  • Tier 1 consists of federally-insured applicants
  • Tier 2 includes institutions that aren’t federally-insured but still subject to “federal prudential supervision”
  • Tier 3 includes institutions that aren’t federal insured or subject to prudential supervision, but are subject to “a supervisory or regulatory framework that is substantially different from, and possibly weaker than… federally insured institutions”

Crypto banks like Custodia and Kraken are likely to fall into Tier 3.

A tiered system as such is consistent with the language first proposed by the Fed last year.

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Caution and risk

While a master account application framework appears to incorporate crypto companies, the Fed also cautioned people for reading too much into the announcement.

The Fed made sure to emphasize 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.”

Reference:

Federal Reserve releases new guidelines for crypto banks


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