‘Master Account’ Guidelines Create Opportunity for Crypto Access to Fed Banks
Neither this post nor any other on cryptofal.com should be taken as financial advice. It is not.
Last Monday, the Federal Reserve Board released the final guidelines for “institutions offering new types of financial products or with novel charters” that are applying for new access to accounts, namely “master accounts and payment services offered by Federal Reserve Banks.” According to the memo, the Board is providing the guidelines to “ensure that Reserve Banks apply a transparent and consistent set of factors when reviewing access requests” and to assure that no chapter would be considered more or less likely to approve requests and deviate from Federal Reserve standards. The increase in novel charters or new financial product offerings by institutions has caused the Board to adjust to the changes occurring in modern finance. As cryptocurrency, digital assets, and other Fintech companies have seen an increased demand for financial services, the Fed has recognized the need to create opportunities for inclusion.
In the past, only regulated and supervised banking institutions were allowed access to the Federal Reserve Banks services. By opening up the process to non-insured institutions, a concern has been raised over the exposure of traditional finance to the riskier FinTech and crypto companies likely to apply. In an effort to assuage any preoccupations, the process of approval for non-insured institutions would require additional screening with stringent risk assessments.
The final guidelines offer a tier ranking system for the level of scrutiny new institutions will encounter. Tier 1, which includes eligible institutions already federally insured, are able to “streamline” through the approval process. Tier 2, categorizes eligible institutions that are not insured but are under prudential supervision by another federal banking agency or a holding company that is subject to Federal Reserve oversight, as having an “intermediate” level of scrutiny. Tier 3, states that eligible institutions that are not federally insured and not considered in Tier 2 as having the “highest” level of scrutiny in the application process.
On the surface level, this move from the Fed is a small win towards legitimizing cryptocurrencies and the offering of cryptocurrencies and other digital assets through financial institutions. Bearing that in mind this frontier of finance is still in its infancy, the process of approval will likely be arduous, long, and highly selective. Moreover, the expectation from the Fed for any new institution is to follow all legal codes as they apply unerringly. Legal ambiguity surrounding cryptocurrencies and digital assets will make legal obligations to multiple agencies difficult to mitigate, especially as legislation begins passing through Congress over the next year.