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Federal Reserve Issues New Guidelines for Crypto Banks

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Federal Reserve Issues New Guidelines for Crypto Banks

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

That could soon change.

The Federal Reserve issued official guidelines this afternoon to oversee the process by which “institutions offering new types of financial products or with new charterscould be granted so-called “master accounts,” a key financial status that allows direct payments with and access to the Fed. All federally chartered banks have a main account.

The 49 pages of the Fed ‘Final advice’ only mentions the word “cryptocurrency” once, when discussing the type of new institutions that may seek prime 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 primary account. The Fed’s application documents for a primary account cite a typical turnaround time of five to seven business days.

The delay is likely due to the Fed’s uncertainty over how to grant traditional banking powers to crypto-native institutions such as Custodia and Kraken, which also hasn’t heard of its main account app. In January, Federal Reserve Chairman Jerome Powell counted the delay to the “hugely precedent” nature of such a decision.

The Fed, however, hopes today’s guidance 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 applications for Federal Reserve accounts and access to payment services to support a secure, inclusive, and innovative payments system,” said the vice president of the Federal Reserve. Fed, Lael Brainard, in a statement.

The guidelines established a tiered framework that organizes applicant institutions according to their level of apparent risk. Tier 1 would be comprised of federally insured applicants, and Tier 2 includes institutions that are not federally insured but are still “subject to federal prudential supervision.”

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

Custodia, Kraken and other similar crypto-banks would 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 master account enforcement framework that appears to incorporate crypto companies, the Fed has also been cautious in reading too far into the announcement.

In addressing the possibility that these guidelines could extend services to new institutions “that present high levels of risk,” the Fed made sure to note that they “do not establish legal eligibility standards, but rather establish a risk-based framework for assessing access requests from institutions legally eligible under federal law.

Asked by Decrypt While today’s news impacted Custodia and Kraken’s main account applications, the Federal Reserve did not immediately respond to a request for comment.

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