Fed Guidelines on Crypto Banking Creates a Framework for Denying Access, Destroying Innovation
Yesterday, the US Federal Reserve Bank announced final guidelines for use when evaluating applications for master accounts with the central bank.
The [Fed] will create a multi-tiered system allowing the Fed to adapt its evaluation process for granting access depending on what kind of financial institution is applying. Each tier corresponds to a respectively more stringent review process.
While these guidelines appear to be a step forward, in reality they demonstrate that the Fed, regulators, and traditional bankers want to stifle innovation by crypto banks with “novel charters.” I.e., unique and innovative business models. Notably, the application process for “novel charter” banks will be significantly more difficult than the process for banks that are already a part of the Fed’s good-old-boy network.
Financial service firms targeting the crypto market have sought these master accounts to allow them to process payments more easily within the US. Fed master accounts are an important part of the US banking system, because they grant banks access to overnight lending, access to the Fed’s payment systems, and because master accounts are interest bearing. Banks are currently earning 2.4% on their reserve balances held in Fed master accounts.
U.S. Sen. Pat Toomey of Pennsylvania has pushed for changes in the Fed’s master account application process, calling the previous standards opaque and inconsistent:
“A master account is a public good, and after the Reserve Trust debacle, the public deserves greater transparency than the guidance released today,” Toomey spokesperson Amanda Thompson said Monday afternoon. “If the Fed doesn’t understand its role as a public trustee, then perhaps Congress should pass legislation to require it to be more transparent and accountable.”
The master account issue has become a flashpoint in part because the Federal Reserve has acted in bad faith with regards to financial institutions that participate in the crypto economy. The Fed broadly categorizes crypto banks as “high-risk” institutions that represent potential threats to the Fed’s banking system and monopoly over the dollar’s monetary policy.
But, while crypto fraud may have topped $20 billion last year, many of us remember the 2008 banking crisis that wiped out more than $2 trillion in wealth, and some of us are old enough to remember the S&L crisis of the 1980’s that cost US taxpayers an inflation adjusted $400 billion.
Earlier this year, Custodia sued the Fed for slow-rolling Custodia’s master account application.
“For more than 19 months, Defendants have refused to act upon Custodia’s application for a master account with the Federal Reserve. Such an account would allow Custodia to directly access the Federal Reserve, rather than going through an intermediary bank,” the lawsuit, which the bank filed at the District Court of Wyoming, states.
Custodia accused the Fed of preventing newcomers such as itself from bringing in new innovative and competitive services in the marketplace “and, not coincidentally, benefits the established financial institutions whose interests are represented on the Board of Directors of the Kansas City Fed.”
The timing of the Fed’s new guidelines is suspicious, given that, “…the Fed’s court deadline to respond to [Custodia’s] complaint happens to be today [8/16/22].”
We believe more integration between TradFi and crypto could be positive for both the US and for the crypo economy. But, traditional banking institutions like the Fed and other national banks have historically been unwilling to work with innovative new industries. We suspect the Fed’s new guidelines are merely a pretext to exclude novel banking services. The Fed’s desire to avoid competition is hidden behind the fig leaf of imposing “prudential supervision” of novel banks.
In our opinion, The Fed’s new guidelines are almost certainly designed to defend the US banking system from an innovative new competitor that is able to generate competitive new business models far more rapidly than TradFi institutions. These new guidelines will likely stifle innovation and attempt to impose onerous regulatory and KYC requirements on crypto firms.
The Fed and the US Government have not been good stewards of Americans’ financial privacy and freedom. No matter how much they shout about terrorism or monetary risk, it has become clear that financial regulations are mechanisms of control and oppression and not means to defend our freedoms. The real risk to the American people is continuing to depend on government for your financial safety.
Cryptocurrencies offer a variety of features that Americans find desirable including improved transaction security, personal custody of funds, privacy, anonymity, and most importantly the ability to participate in a wide array of new financial products that exist as part of the DeFi ecosystem. The Fed wants to put a stop to all of that.
