This announcement could allow American crypto banks to perform traditional and crypto banking functions. American financial institutions who wanted to do both traditional and crypto transactions have had to choose a path.

This afternoon, the Federal Reserve issued formal guidelines to guide the process by “institutions offering new financial products or with unique charters” to be granted “master accounts.” A key financial status that allows direct payments to the Fed and gives them access to financial information. Every federally chartered bank has a master account.

In the Fed’s 49-page ‘Final Guidance, the term “cryptocurrency”, is only mentioned once when discussing new institutions that might seek master accounts under these guidelines. The announcement today is inextricably tied to the crypto industry.

Custodia, a crypto-bank founded by Caitlin Lang, former managing director of Morgan Stanley, sued the Federal Reserve in June. They cited a 19-month delay in processing the bank’s master account application. According to the Fed’s master account application paperwork, the turnaround time is typically five to seven days.

This delay could be due to uncertainty at the Fed about how to grant traditional banking power to crypto-native institutions such as Custodia or Kraken. The Fed has yet to respond to its master account application. Federal Reserve Chairman Jerome Powell attributed the delay in January to the “hugely precedent” nature of such an important decision.

However, the Fed hopes today’s guidelines will streamline the process of reviewing applications for “novel” institutions such as Custodia or Kraken.

Lael Brainard, Fed vice chair, stated in a statement that the new guidelines “provide a consistent, transparent process to assess requests for Federal Reserve accounts, access to payment services, in order to support an innovative, safe, inclusive payment system.”

These guidelines establish a hierarchy that organises applicant institutions according to their risk level. Tier 1 would include federally insured applicants. Tier 2 would include institutions that aren’t federally insured but are still subject to federal prudential oversight.

Tier 3 institutions are not federally insured or subject to prudential surveillance, but are subject to “a supervisional or regulatory framework that’s substantially different from, or possibly weaker than…federally insured institutions.”

Tier 3 would most likely include Kraken, Custodia and other crypto banks similar to Kraken.

This tiered system is in line with the language that was first proposed by Fed in 2021, but not adopted.

The Fed did not create a master account application structure that would include crypto companies. However, it cautioned against reading too much into the announcement.

The Fed addressed the possibility that these guidelines might expand services to new institutions “that pose high risks” and made sure to point out that they “do NOT establish legal eligibility standards, but rather establish a risk-focused framework to evaluate access requests from federally eligible institutions.”

Decrypt was asked by if today’s news had an impact on the master accounts applications of Custodia or Kraken. The Federal Reserve didn’t immediately respond to a request.


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Angie Byrd