The U.S. Federal Reserve has published guidelines that establish a ‘transparent, risk-focused, and consistent set of factors for Reserve Banks to use in reviewing requests to access Federal Reserve accounts and payment services’. This initiative is set to allow crypto banks to enter the U.S. banking system in a more regulated manner. [VR1]
Crypto and Digital Assets companies have long shown interest in seeking bank charters for two primary reasons. Firstly, obtaining a bank or trust charter enhances an organization’s credibility and expands its pool of potential clients. This is principally due to the regulations inherent within the charter and the subsequent mitigation of credit and operational risks. Additionally, operating as a bank eliminates the necessity of depending on a banking intermediary to access the US financial system. The directives govern the procedure through which “organizations introducing innovative financial products or possessing unique charters” may be awarded “master accounts.” These are a key financial status possessed by all federally-chartered banks, that allows for direct payments with, and access to, the Federal Reserve. A three-tiered system has been proposed to evaluate the risk levels of the applicant institution.
- Tier 1: Federally insured applicants
- Tier 2: Applicants that are not federally-insured but still subject to “subject prudential supervision by a federal banking agency.”
- Tier 3: Applicants that are “not federally insured and not subject to prudential supervision by a federal banking agency.” This category is where crypto banks would most likely fit.
The level of scrutiny that a Federal Reserve Bank branch applies to an applicant is directly dependent on the application tier which is determined by their level of regulation.
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The guidelines are substantially similar to those proposed by the Federal Reserve Board in its May 2021 proposal and March 2022 supplemental proposal, which included principles to identify and mitigate risks, promote a safe, efficient, inclusive, and innovative payment system, and ensure that the applicant institutions [VR2] [AP3] are treated fairly and equitably.
The guidelines are intended to limit the potential systemic risks posed by the interconnectedness of digital assets with other segments of the financial system by establishing a robust supervisory and regulatory framework for the financial industry. As the cryptocurrency economy becomes more entwined with the traditional economy, regulators recognize that the future of financial supervision is digital. To be prepared for the future of compliance, regulators are conducting techsprints to gather multi-sectoral insights on cryptocurrencies and other emerging technologies that can have a significant influence on the global economy and digital innovation.
Although the guidelines do not explicitly confer banking status upon crypto banks, the initiative suggests a realm of potential and fresh product functionalities through experimentation and collaborations within the financial services sector.
The guidelines necessitate the creation of a fintech innovation ecosystem that can accelerate innovation by enabling interaction between regulators, financial institutions, government bodies, fintechs and other stakeholders on an integrated platform. Finally, to complement the evaluation, synthetic data helps run pilots, build PoCs and predict product-market fit outcomes efficiently.
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