When I worked at the Federal Reserve, we used to joke that our job was to protect the status quo. The Federal Reserve’s mandate has long included financial stability, and certainly not financial disruption. But Federal Reserve Governor Chris Waller’s speech calling on Fed staff to investigate creating a new “payments account” for non-bank payment providers at this week’s Federal Reserve Payments Innovation Conference marks the first serious challenge to the assumption that only banks can move money in the United States 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 meant that the real competition is who has access to the monetary system: banks, fintechs or decentralized networks. Two years later, Waller’s proposal takes that battle to the Federal Reserve itself.
While the UK and EU have comprehensive frameworks for payment providers such as electronic money institutions, the United States, by contrast, does not have a similar federal payments charter. Nonbanks must navigate 50 state money transfer laws or rely on banking associations. The Office of the Comptroller of the Currency’s long-debated fintech charter never got off the ground. This regulatory gap 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 need to partner with banks.
Governor Waller’s proposal for a “payments account” – what he called a “thin master account” – would give eligible nonbank institutions direct access to the Federal Reserve’s payment channels, but without the privileges traditionally granted to banks. Balances in these accounts would not earn interest, could be subject to limits, and would not have daytime overdrafts or access to discount windows. Its only objective would be to facilitate payments.
For decades, every American transaction has ultimately depended on a bank account at the Federal Reserve. 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 the central monetary infrastructure, effectively creating an American payments charter through access to the Federal Reserve system rather than through legislation.
In many ways, Waller’s proposal revives the old idea of narrow banking: separating the payments function of banking from the credit creation function. Thin banks hold high-quality liquid assets and exist to move money, not lend it. The concept has resurfaced repeatedly since the 1930s, but has never gained traction in the United States… until now.
This payments account could also reshape the way stablecoins fit within the monetary system. Payments stablecoin issuers already operate as a form of narrow bank: they hold fully backed reserves and facilitate payments rather than loans. However, the GENIUS Act does not give them direct access to the Federal Reserve’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 Federal Reserve payments account, their tokens would be backed by the central bank’s own money. This would also provide the Federal Reserve with expanded tools to manage systemic risk arising from payment stablecoin issuers and close the gap between public and private digital dollars.
Stablecoins backed by Federal Reserve 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 Federal Reserve. His payments account proposal suggests a middle path: let the private sector innovate from the beginning and keep the Federal Reserve as the trusted settlement layer behind it.
When I worked at the Federal Reserve, protecting the status quo was synonymous with protecting financial stability. However, stability also depends on adaptability, including the ability of central banks to innovate to maintain control of their monetary levers. Quote the novel by Giuseppe Tomasi di Lampedusa The leopard: “If we want things to continue as they are, things will have to change.”
