More Clarity Needed On Crypto Access To Fed Accounts

April 27, 2022
Large industry players are pushing for more clarity on how reserve banks will evaluate crypto firms’ requests to the US payment system as a Federal Reserve consultation ends.

Large industry players are pushing for more clarity on how reserve banks will evaluate crypto firms’ requests to the US payment system as a Federal Reserve consultation ends.

In a letter sent to the Fed, a group of bank associations and The Clearing House (TCH) say they have significant concerns that fundamental issues are not addressed in a Fed proposal that intends to create a clear and uniform process for evaluating master account requests by crypto firms.

“[We] continue to have significant concerns that the reproposal does not appropriately and transparently address how the Board and Reserve Banks will resolve many of the most fundamental issues that any application by a novel charter is likely to raise,“ the group says.

The comments were submitted in response to the Fed’s consultation on an updated proposal on evaluating master account requests, which closed last Friday (April 22).

A master account is a settlement account allowing institutions to settle their Fed financial services transactions directly with a reserve bank. Firms can also participate indirectly using the master account of another institution that has agreed to act as a correspondent.

The proposed guidelines set out six principles and identify factors that Federal Reserve banks should take into account when evaluating access requests by “novel” charters, such as crypto firms, to the central bank’s payments system.

The issue has become particularly pressing after crypto firms, chartered under Wyoming’s special purpose bank charter, have started to apply for master accounts to the reserve banks.

To ensure that the reserve banks apply a transparent and consistent process during the evaluation of these requests, last May the Fed proposed account access guidelines. Later, in light of the submissions received, in March this year, the bank released updated guidelines, which now include plans to create a three-tiered review framework for applicants.

“We appreciate the Board’s response to certain comments that we raised in our prior comment letters,” the banking groups say in the letter. However, they claim that the reproposal does not address “a range of critical issues and questions that we raised in our prior comment letters”.

For instance, the guidelines should clarify which institutions are legally eligible to apply for master accounts; explain how applications will be reviewed and scrutinised, and what conditions and limitations may be imposed in connection with the approval, at each tier; and explain how the ongoing oversight and monitoring exercise of the reserve banks will look like at each tier.

They also ask the Fed to clarify that any decision at the second and third tiers shall be subject to review and non-objection by the reserve banks.

In a separate letter, the Conference of State Bank Supervisors (CSBS) has also given a dress down to the proposal, claiming that it undermines the dual banking system.

Tier 2 would favour federally chartered institutions and create an unlevel playing field for state-chartered institutions, it argues, while Tier 3 would apply the strictest level of review to only state-chartered entities, suggesting that federal regulation and supervision are more robust.

The CSBS, whose mission includes the protection of the US dual banking system, urged the Fed to reconsider the proposal.

Good but too broad

Although the supplemental consultation’s site does not include any submissions, the initial consultation sparked interest among a variety of market players, including banks, crypto firms, lawmakers and even a UK payments firm.

Stakeholders altogether welcome the Fed's efforts to create transparent and uniform guidelines for evaluating account requests, but they all noted to some extent that the framework is too general.

The American Bankers Association (ABA) stressed that the proposed broad conceptual framework does not provide enough granularity to ensure the safety and soundness of the payment system.

California-based crypto exchange Kraken noted that the “six principles as drafted are broad, leave wide discretion to individual Reserve Banks, and provide little meaningful guidance to a depository institution seeking master account access as to the likelihood of its application being approved”.

Nor does it “arm regulators or applicants with the information necessary to determine what the application process will look like and how the applicants will be evaluated”, the Blockchain Association bemoaned, adding that the guidelines should, for example, include a timeline for how long the review process would take.

This could prove to be a crucial issue for crypto firms, especially as the example of Wyoming-chartered crypto firms Kraken and Custodia, formerly Avanti, shows how long that process could take.

The firms filed their first requests in October 2020 to become the first state-chartered crypto banks to access the federal payment system.

The ABA granted a routing number to both firms earlier this year, a critical first step for banks seeking master Fed accounts, but the Fed’s decision on whether to open up its payment infrastructure to these “novel” applicants is still pending.

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