The Fed Releases Guidelines for Crypto Banks

American Financial institutions looking to operate in both traditional banking services and crypto have, up until today, had to choose one or the other, but that may soon change.

The Federal Reserve has revealed plans to begin a program in which “institutions offering new types of financial products or with novel charters” could be granted “master accounts,” a pivotal financial status that enables the company to access the FED. All banks that work with the Fed retain a master account.

The 49-page ‘Final Guidance’ makes mention of cryptocurrency only once, in connection with the novel institutions that could potentially seek master accounts within these new guidelines. However, the subtext of this document is unarguably tied to the crypto industry.

Recently, the crypto bank founded by former Morgan Stanley managing director Caitlin Long, Custodia, sued the Federal Reserve in June, citing the 19-month delay in the bank's master account application process. The Fed claims the application process for master accounts typically only takes five to seven business days.

The delay is presumably due to the Fed's uncertainty about giving traditional banking powers to crypto institutions such as Kraken and Custodia; the former has also been in the master account limbo process. Speaking on the delay in January, Federal Reserve Chairman Jerome Powell claimed the process was slowed due to such a decision's “hugely precedential” nature.

The Fed is hopeful that today's releases will help streamline the application process for “novel” establishments like Kraken and Custodia.

“The new guidelines provide a consistent and transparent process to evaluate requests for Federal Reserve accounts and access to payment services to support a safe, inclusive, and innovative payment system," Fed vice chair Lael Brainard said in a statement.

The process is a tiered framework that designates the applicants based on their apparent risk level. With Tier 1 consisting of federally-insured applicants, tier 2 includes those not federally insured but still “subject to federal prudential supervision."

Tier 3 will include institutions that are neither federally insured nor subject to prudential oversight but instead subject to “a supervisory or regulatory framework that is substantially different from, and possibly weaker than… federally insured institutions.”

Kraken, Custodia, and other similar crypto banks would likely fall into Tier 3. This system is consistent with the language proposed by the Fed in 2021.

Such a process bodes well for the crypto industry as this is the first step toward federal adoption, something the government must be keen on after the fall of such projects like Terra and Celcius.