US Fed Provides Access to Central Banking System for Cryptobanks

By: Dickson Arinze

August 16, 2022 12:41 AM

A three-tiered approach for determining whether a financial institution should have access will be developed by the central bank.

The United States Federal Reserve announced on Monday that it is disseminating its final instructions for new financial institutions to access their "master accounts," which are necessary for these companies to take part in the international payment system.

The U.S. central bank appears to have taken a step forward with Monday's announcement by potentially giving Wyoming special purpose depository institutions (SPDI), such as Custodia (previously Avanti) and Kraken Bank, access to these accounts so they wouldn't require middlemen banks. The first set of guidance was offered by the Fed last year, kicking off a request-for-comments period. There was a second public input procedure earlier this year as a result of the nearly 300 responders who submitted remarks.

According to a statement from Fed Vice Chair Lael Brainard, "The new guidelines establish a consistent and transparent process to evaluate requests for Federal Reserve accounts and access to payment services in order to ensure a safe, inclusive, and creative payment system."

The recommendations, which are essentially consistent with those that were first put up in 2021, will establish a multi-tiered structure that will enable the Fed to modify its evaluation process for providing access depending on the type of financial institution that is making an application. Each tier has a correspondingly more rigorous evaluation process.

Tier 1 banks would receive federal insurance under the guidelines. However, Tier 2 banks are still "subject to prudential supervision by a federal banking agency," even though they are not federally insured.

The Wyoming crypto banks would most likely fall under the third category, which includes businesses that are "not federally insured and nor subject to prudential regulation by a federal financial institution."

The Fed received comments after issuing both its initial proposed guideline in 2021 and its modified guidance earlier this year, according to a statement released with the guidance and press release. Many of these respondents submitted a boilerplate letter, but it appears that the Fed only received about 70 distinct responses.

"On the other side, a large number of comments suggested that the Proposed Guidelines should offer a more difficult path for institutions with unique charters to access accounts and services. Many of these commenters claimed that, regardless of the institution's business model, the Proposed Guidelines should subject non-federally insured institutions to the same types of standards as those that apply to federally insured depository institutions "The report stated.