The Fed updates the framework for reviewing primary bank account applications, benefiting fintech companies.

The Federal Reserve released guidelines on applying for a master account at reserve banks, effectively opening up access to master accounts, especially as many crypto companies have faced challenges in obtaining them. The new application review framework now allows crypto banks to be granted powers similar to traditional banks.

Master Account

In the Federal Reserve's account structure, a Master Account can establish relationships between depository institutions and reserve banks. The Master Account is centrally managed by the reserve bank, recording all financial rights, obligations, and transaction records between the account-holding institution and the reserve bank. It also manages the credit risk associated with the institution's use of Federal Reserve services.

If a financial services provider does not have a Federal Reserve Master Account, it must rely on a third-party bank with a Master Account to provide related services. According to a recent announcement, the Federal Reserve has updated the review standards for applying for a Federal Reserve Master Account and payment services.

The Federal Reserve explained that this is due to a significant increase in institutions offering new financial products, with many institutions applying for Master Accounts. Therefore, the Federal Reserve will evaluate institutions' applications based on the latest guidelines, using transparent and consistent criteria.

New Review Framework

The new guidelines include a tiered review framework, with varying review standards based on the level of institutional risk:

1. Simplified review: Qualified institutions with Federal Deposit Insurance Corporation (FDIC) coverage.
2. Intermediate review: Institutions regulated by the Federal Reserve but without FDIC coverage.
3. Highest level review: Institutions without FDIC coverage or Federal Reserve regulation, subject to the most rigorous review.

Challenges for the Crypto Industry

In reality, the crypto industry has long complained about difficulties in applying for Federal Reserve Master Accounts. Caitlin Long, CEO of crypto bank Custodia (formerly Avanti), sued the Federal Reserve earlier this year for delaying her Master Account application for more than the mandated 19 months, as detailed in a legal document.

The legal document stated that such deliberate delays had violated the one-year statutory deadline.

In response, Federal Reserve Chair Jerome Powell mentioned during a January congressional hearing that the abnormal delays in Master Account applications by entities like Custodia and exchange Kraken were due to granting crypto institutions powers similar to traditional banks, as reported here.

Although the Federal Reserve has updated its review framework, Caitlin Long and Kraken CEO Jesse Powell have not responded to this news.