When I worked at the Federal Reserve, we joked that our job was to protect the status quo. The Fed’s mandate has long included financial stability, and certainly not financial disruption. But Fed Governor Chris Waller’s speech calling on Fed staff to study creating a new “payments account” for non-bank payment providers at this week’s Fed Payments Innovation Conference marks the first serious challenge to the assumption that only banks can move money in America and who is allowed access to the Fed’s balance sheet.
When I wrote in 2023 that “Stablecoins are the battleground for the future of money” I also wanted to say that the real fight was over who would have access to the monetary system: banks, fintechs or decentralized networks. Two years later, Waller’s proposal brings this battle back to the Fed itself.
While the UK and EU both have comprehensive frameworks for payment providers such as electronic money institutions, the US, in contrast, does not have a similar federal payments charter. Nonbank organizations must comply with 50 state money transmitter laws or rely on banking partnerships. The fintech charter of the Office of the Comptroller of the Currency, discussed at length, never took off. This regulatory void forced innovation to fill the gaps and helped pave the way for stablecoin issuers to become the de facto payments companies of the digital age. But these stablecoin issuers do not have access to the Fed’s payment channels and generally must partner with banks.
Gov. Waller’s proposal for a “payment account” — what he called a “lean principal account” — would give eligible nonbank institutions direct access to the Federal Reserve’s payment channels, but without the privileges traditionally afforded to banks. The balances in these accounts would not earn any interest, may be subject to limits and would not provide access to daytime overdrafts or discount windows. Their sole objective would be to facilitate payments.
For decades, every U.S. transaction ultimately rested in a bank account with the Fed. Fintechs, card networks and digital wallets could innovate in partnership with banks. A payments account would change this paradigm by opening a narrow, supervised corridor to core monetary infrastructure – creating a U.S. payments charter through access to the Fed system rather than legislation.
In many ways, Waller’s proposal revives the old idea of narrow banking – separating the payment function of banking from the credit creation function. Narrow banks hold high-quality liquid assets and exist to move money, not lend it. The concept has resurfaced several times since the 1930s, but never gained traction in the United States – until today.
This payment account could also reshape how stablecoins fit into the monetary system. Payment stablecoin issuers already operate as a form of narrow banking – holding fully collateralized reserves and facilitating payments rather than loans. Yet the GENIUS Act does not give them direct access to the Fed’s payment channels, the only step that would integrate these stablecoin issuers into the US monetary system.
If stablecoin issuers could hold reserves directly through a Fed payment account, their tokens would be backed by the currency of the central bank itself. It would also provide the Fed with expanded tools to manage systemic risk arising from stablecoin issuers and close the gap between private and public digital dollars.
Stablecoins backed by Fed payment accounts would also offer a viable alternative to a retail central bank digital currency. Governor Waller has long been skeptical of a central bank digital currency issued by the Fed. His payment account proposal suggests a middle path: let the private sector innovate from the start and keep the Fed as the trusted settlement layer behind it all.
When I worked at the Fed, protecting the status quo meant protecting financial stability. However, stability also depends on the capacity to adapt, in particular the capacity of central banks to innovate in order to maintain control of their monetary levers. To quote the novel by Giuseppe Tomasi di Lampedusa The Leopard: “If we want things to stay as they are, things will have to change.”
