The crypto industry continues to break down barriers at the heart of the U.S. financial system, and Kraken’s approval of a Federal Reserve limited account marked another such step that analysts say could be the first in a trend.
The arrival of cryptocurrencies in the Fed’s payments system — tentative and limited as it is — has irked traditional banks and caused some confusion in the Fed’s ongoing efforts to draft policies on how crypto companies are supposed to go about obtaining limited “skinny” master accounts. But Kraken co-CEO Arjun Sethi said this development represents “what it will look like when crypto infrastructure becomes core financial infrastructure.”
Kraken’s Wyoming-licensed banking arm, Payward Financial, gets one year of “limited use” account access as a “Tier 3” entrant, according to the Federal Reserve Bank of Kansas City, one of dozens of regional banks in the Federal Reserve System.
“We view this as the first of many Federal Reserve approvals allowing crypto entities to obtain master accounts, giving them direct access to central bank payment rails, including Fed Wire,” Jaret Sieburg, a Washington policy analyst at TD Cowen, said in a client note Thursday. “Crypto entities’ access to primary accounts was inevitable under President [Donald] Trump, given his support for the crypto industry. We expect additional announcements in the coming months. »
Ian Katz, an analyst who follows federal financial policies at Capital Alpha in Washington, echoed that sentiment.
“The Fed’s decision could open the door to other crypto operations, including Circle, Anchorage and Custodia, a Wyoming-based company that unsuccessfully sued the Fed for the right to have a master account,” he noted.
What does direct access to the Fed’s payment systems mean for Kraken? Potentially, according to Sethi: “instant settlement between fiat and crypto, institutional-grade treasury management integrated with digital asset custody and programmable financial products built within a fully regulated framework.”
Those operating traditional banks in the United States were unhappy with the development of Kraken – the latest threat they have flagged in the crypto space.
“There are significant risks in expanding direct access to Fed accounts to institutions that operate outside of the traditional banking regulatory framework,” the Independent Community Bankers of America said in a statement. “The Fed should continue to limit access to primary accounts to institutions that meet the highest standards in the financial services industry.”
But former Kraken CEO and current chairman Jesse Powell celebrated the development.
“We are the bankers now,” the Kraken co-founder told social media site X. “In the saddle.”
Other crypto-related institutions have also sought to get on board with the Fed, including Anchorage Digital (which sought a full master account, which would include interest on reserves placed with the Fed) and recent arrival among federally approved trusted banks, Erebor Bank. The industry also continues to pressure the Fed to work toward establishing a new policy to replace the 2022 forecast on which the Kansas City Kraken decision was based.
At the national level, the Federal Reserve Board has begun drafting new policies aimed at establishing what are commonly called “skinny” master accounts for businesses that do not need the full range of traditional master account services. But that process is still in its early stages, and if the Fed’s regional banks begin approving similar accounts in the meantime, it could create uncertainty about what will happen when the new policy is set.
“This action ignores the public comments requested by the Federal Reserve on this framework, and it was issued without any transparency regarding the approval process or the risk mitigation measures that were imposed to address the very significant risks it raises,” Paige Pidano Paridon, co-head of regulatory affairs at the Bank Policy Institute, said in a statement.
The Fed’s board of directors in Washington, where the central bank is headquartered, this week deferred requests for comment to Kansas City.
The Fed’s regional banks, of which there are about a dozen in the United States, each operate according to their own priorities and direction, which can make their decisions uneven on such issues. So it’s unclear whether the location of the Fed’s hub — Minneapolis for Anchorage Digital, for example, and Cleveland for Erebor — will affect their results.
The Kansas City Fed will continue to work with area businesses “to ensure that access to the payments system promotes a fair level of competition and strengthens the stability and resiliency that have underpinned the Federal Reserve’s payments system offerings throughout its history,” said Chairman Jeff Schmid.
