Federal Reserve launches new guidelines for crypto banks

Until now, US financial institutions that wanted to conduct both crypto transactions and traditional banking services had to choose a path.

That may soon change.

The Federal Reserve released formal guidelines this afternoon to oversee the process “institutions that offer new types of financial products or with new charters” could be given so-called “master accounts”, an important financial status that allows for direct payments with and access to the Fed. All federally chartered banks have a general account.

Fed’s 49 pages ‘Final Guidance’ mentions the word “cryptocurrency” only once, when discussing the types of new institutions that may apply for master accounts under these guidelines. But the subtext of today’s announcement is inextricably linked to the crypto industry.

Custodia, a crypto bank founded by former Morgan Stanley CEO Caitlin Long, sued the Federal Reserve in June, citing a 19-month delay in the Fed’s processing of the bank’s application for a main account. The Fed’s application papers for a main account refer to a typical processing time of five to seven business days.

The delay is likely due to the Fed’s uncertainty about how to grant traditional banking powers to crypto-native institutions like Custodia and Kraken, which also have yet to receive feedback on its master account application. In January, central bank chief Jerome Powell chalked up the delay to the “highly precedential” nature of such a decision.

However, the Fed hopes today’s guidelines will help streamline the application review process for “new” institutions like Custodia and Kraken.

“The new guidelines provide a consistent and transparent process for evaluating requests for Federal Reserve accounts and access to payment services to support a safe, inclusive and innovative payments system,” Fed Vice Chairman Lael Brainard said in a statement.

The guidelines set up a tiered framework that organizes applicant institutions based on their apparent level of risk. Tier 1 will consist of federally insured applicants, and Tier 2 includes institutions that are not federally insured but are still “federally supervised.”

Tier 3 includes institutions that are neither federally insured nor supervised, but rather subject to “a supervisory or regulatory framework that is substantially different from, and possibly weaker than, … federally insured institutions.”

Custodia, Kraken and other similar crypto banks will likely fall into Tier 3.

Such a tiered system is largely consistent with language first proposed — but not adopted — by the Fed in 2021.

Despite creating a framework for main account applications that appears to include crypto companies, the Fed also signaled caution about reading too far into the announcement.

In addressing the potential for these guidelines to extend services to new institutions “that present high levels of risk,” the Fed made sure to note that they “not establish legal eligibility standards, but instead establish a risk-focused framework for evaluating access requests from legally qualified institutions under federal law.”

When asked by Decrypt whether today’s news affected the master account applications of Custodia and Kraken, the Federal Reserve did not immediately respond to a request for comment.