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Federal Reserve releases guidelines that could finally allow crypto banks to get "master accounts"

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(Kitco News) - On Monday, the U.S. Federal Reserve published its long-awaited final guidelines "that establish a transparent, risk-based, and consistent set of factors for Reserve Banks to use in reviewing requests to access Federal Reserve accounts and payment services."

In layman's terms, the guidelines lay out the factors that the Fed will look for when it evaluates whether or not to give a financial institution access to its "master accounts." Access to these accounts is needed to participate in the global payment system.

According to a statement that accompanied the final guidance, a three-tiered review framework will be established to provide extra clarity on the level of due diligence required for each applicant based on the institutions' risk level.

The wording that is most applicable to crypto banks states, "Institutions that engage in novel activities and for which authorities are still developing appropriate supervisory and regulatory frameworks would undergo a more extensive review."

The guidelines were originally proposed in May 2021 and have gone through several rounds of refinement to arrive at their current state. One of the main goals of the process was "to provide more comparable treatment between non-federally-insured institutions chartered under state and federal law."

This development is a positive step forward for banks that seek to serve the cryptocurrency industry. It establishes a framework that could allow Wyoming special purpose depository institutions (SPDI) like Custodia and Kraken Bank to gain access to a master account so that they will no longer need intermediary banks.

"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," Vice Chair Lael Brainard said in the announcement.

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Based on the new guidelines, Tier 1 banks are qualified to be federally insured, while Tier 2 banks would not be federally insured but are still "subject to prudential supervision by a federal banking agency."

Tier 3 firms are considered "not federally insured and not subject to prudential supervision by a federal banking agency." This is the classification that would likely be applied to the vast majority of crypto banks that apply for a master account.

Its been a long and drawn-out process as the Federal Reserve has seemed to drag its feet through every step. In June of 2022, Wyoming-based Custodia bank sued the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City, claiming that the 19 months it had been waiting to receive a master account exceeded the legally set limits on response time.

While the new guidelines are a step in the right direction, it will still likely take a considerable amount of time for crypto banks to be approved for master accounts through this process.

"These guidelines are only the first step in providing a transparent process. More work remains to be completed before a process is established to fully implement the guidelines. There is a risk that this publication could set the expectation that reviews will now be completed on an accelerated timeline," Federal Reserve Bank governor Michelle Bowman warned in a statement that accompanied the guidelines.


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