The cryptocurrency industry continues to break down barriers in the US core financial system, and digital asset exchange Kraken’s approval for a limited account at the Federal Reserve marked another milestone that analysts believe could be the first of a trend.
The arrival of cryptocurrencies in the Federal Reserve’s payments system (albeit provisional and limited) has irritated traditional banks and injected some confusion into the Fed’s ongoing effort to draft policies for how cryptocurrency companies are supposed to proceed to obtain limited “thin” master accounts. But Kraken co-CEO Arjun Sethi said this development represents “what it looks like when crypto infrastructure matures and becomes a core financial infrastructure.”
Payward Financial, Kraken’s banking arm licensed in Wyoming, receives one year of access to a “limited purpose” account as a “Tier 3” participant, according to the Federal Reserve Bank of Kansas City, one of a dozen regional banks in the Federal Reserve system.
“We view this as the first of many Federal Reserve approvals for crypto entities to obtain master accounts, giving them direct access to central bank payment avenues, including Fed Wire,” Jaret Sieburg, a Washington policy analyst at TD Cowen, said in a client note on Thursday. “Crypto entities’ access to master accounts was inevitable under the presidency [Donald] Trump, given his support for the crypto sector. 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 doors to other crypto operations, including Circle, Anchorage and Custodia, a Wyoming-based company that unsuccessfully sued the Fed for the right to hold a master account,” he noted.
What does direct access to the Federal Reserve’s payment systems mean for Kraken? Potentially, according to Sethi: “instant settlement between fiat and crypto, institutional-grade cash management integrated with digital asset custody, and programmable financial products built within a fully regulated framework.”
Those who operate traditional banks in the US were unhappy with the development of Kraken, the latest threat they have pointed out in the crypto space.
“There are significant risks in expanding direct access to Federal Reserve accounts to institutions that operate outside the traditional banking regulatory framework,” Independent Community Bankers of America said in a statement. “The Federal Reserve should continue to limit access to master accounts to institutions that meet the highest standards of the financial services industry.”
But former Kraken CEO and current president Jesse Powell welcomed the development.
“Now we are the bankers,” Kraken’s co-founder posted on social media site X. “Get ready.”
Other cryptocurrency-linked institutions have also sought to get on the Fed’s rails, including Anchorage Digital (which has sought a full master account, which would include earning interest on reserves placed with the Fed) and the recent arrival among federally approved trust banks, Erebor Bank. The industry also continues to pressure the Federal Reserve in its effort to set a new policy to replace the 2022 guidance on which the Kansas City Kraken decision was based.
At the national level, the Federal Reserve Board began drafting new policies to establish what are commonly known as “thin” master accounts for businesses that do not need the full range of traditional master account services. But that process is in its early stages, and if regional Federal Reserve banks begin approving similar bills in the meantime, it could create uncertainties about what will happen when the new policy is set.
“This action ignores the public comments the Federal Reserve sought on this framework, and was issued without transparency in the approval process or the risk mitigations that have been imposed to address the very significant risks it poses,” Bank Policy Institute co-director of regulatory affairs Paige Pidano Paridon said in a statement.
The Federal Reserve board in Washington, where the central bank is based, deferred requests for comment this week to Kansas City.
The regional Federal Reserve banks, of which there are a dozen across the United States, each operate under their own priorities and management, which can make their decisions on such matters uneven. So it’s unclear whether the location of the Fed’s hub (Minneapolis for Anchorage Digital, for example, and Cleveland for Erebor) will affect its results.
The Kansas City Fed will continue to work with businesses there “to help ensure that payments system access supports a level competitive playing field and reinforces the stability and resilience that has underpinned the Fed’s payments system offerings throughout their history,” Chairman Jeff Schmid said.
