Time and again, there have been debates w.r.t. which kind of institutions should access the Federal Reserve’s payment systems. Traditional banks, mostly federally supervised, have been at loggerheads with institutions more inclined to fintech, including those with their toes dipped into the crypto waters.
Well, it looks like we’re finally at the tipping point now. On Monday, the Fed published its final guidance for financial institutions to access its master accounts. Similarly, crypto companies will likely be subject to a higher review system.
Master accounts, as such, play a crucial role in the finance sphere, and without them, financial service providers are dependent upon intermediary banks that have them.
The tier 1, tier 2, and tier 3 breakdown
The Fed noted that institutions offering new types of financial products have grown with time, and many have requested access to its accounts and payment services. The agency’s final guidelines are congruent with the multi-tiered system that the Board put forward in its May 2021 proposal and March 2022 supplemental proposal.
Per Fed’s Vice Chair Lael Brainard,
“The new guidelines provide a consistent and transparent process to evaluate requests for Federal Reserve accounts and access to payment services in order to support a safe, inclusive, and innovative payment system.”
The layered system, as such, will allow the Fed to mold its evaluation process for granting access to different kinds of financial institutions. Per the guidance, tier 1 banks will be federally insured. On the other hand, tier 2 banks will not be federally insured but will be subject to “prudential supervision” by a federal banking agency.
Firms that are “not federally insured” and “not subject to prudential supervision by a federal banking agency” will essentially fall under tier 3. Crypto banks will be under this category. Per the guidance,
“These institutions would generally receive the strictest level of review.”
It is worth noting that the Fed received responses from various institutions with novel charters, including crypto custody banks, during its comment period.
Fed under scrutiny
It’s a known fact that Kraken and Custodia applied for master account access in 2021. Earlier this year, both companies received routing numbers from the American Bankers Association, bringing them closer to being allowed to deposit funds with the Fed and access the global payments system.
Despite receiving a number, Custodia sued the Fed in June. It contended that the agency had not honored its mandatory one-year deadline in deciding whether or not to grant the firm access.