Key Exchange Update
The crypto industry keeps knocking down the barriers into the core U.S. financial system, and digital assets exchange Kraken’s approval for a limited Federal Reserve account marked another such milestone that analysts think could be the first of a trend.
The crypto arrival inside the Fed payment system — provisional and limited though it is — has aggravated the traditional banks and injected some confusion in the Fed’s ongoing effort to write policies for how crypto firms are supposed to go about getting limited “skinny” master accounts. But Kraken’s Co-CEO Arjun Sethi said that this development represents “what it looks like when crypto infrastructure matures into core financial infrastructure.”
Kraken’s Wyoming-chartered banking arm, Payward Financial, is granted a year of access to a “limited purpose” account as a “Tier 3” entrant, according to the Federal Reserve Bank of Kansas City, one of a dozen regional banks in the Federal Reserve system.
“We see this as the first of many Federal Reserve approvals for crypto entities to obtain master accounts, which gives them direct access to the central bank payment rails including Fed Wire,” said Jaret Sieburg, a Washington policy analyst at TD Cowen, in a client note on Thursday. “Crypto entity access to master accounts was inevitable under President [Donald] Trump, given his support for the crypto sector. We expect additional announcements in the coming months.”
Ian Katz, an analyst who tracks federal financial policies at Capital Alpha in Washington, echoed that sentiment.
“The Fed’s decision could open the doors for other crypto operations including Circle, Anchorage and Custodia, a Wyoming-based firm that has unsuccessfully sued the Fed over the right to have a master account,” he noted.
What does direct access to the Fed payments 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 U.S. were displeased with the Kraken development — the latest threat they’ve flagged from the crypto space.
Platform Context
“There are significant risks to expanding direct Fed account access to institutions that operate outside the traditional banking regulatory framework,” the Independent Community Bankers of America said in a statement. “The Fed should continue limiting master account access to institutions that meet the financial services sector’s highest standards.”
But former Kraken CEO and current chairman, Jesse Powell, celebrated the development.
“We’re the bankers now,” the Kraken co-founder posted on social media site X. “Saddle up.”
What To Watch
Other crypto-tied institutions have also sought entry onto the Fed 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 lobby the Fed on its effort to establish a new policy to replace the 2022 guidance that Kansas City’s Kraken decision was based on.
At the national level, the Federal Reserve board started writing new policies for establishing what are commonly referred to as “skinny” master accounts for firms that don’t need the entire array of traditional master account services. But that process is in the early stages, and if regional Fed banks start approving similar accounts in the meantime, it could create uncertainties about what happens when the new policy is set.
“This action ignores public comment that the Federal Reserve sought on this framework, and it was issued with no transparency into the process for approval or the risk mitigants that have been imposed to address the very significant risks it raises,” the Bank Policy Institute’s co-head of regulatory affairs, Paige Pidano Paridon, said in a statement.
The Fed board in Washington, where the central bank is headquartered, deferred requests for comment this week to Kansas City.
The regional Fed banks, of which there are a dozen throughout the U.S., each operates under its own priorities and management, which can make their decisions uneven on such matters. So it’s uncertain whether the location of the Fed hub — Minneapolis for Anchorage Digital, for instance, and Cleveland for Erebor — will affect their outcomes.
The Kansas City Fed will keep working with firms there “to help ensure that access to the payment system supports a level competitive field and reinforces the stability and resilience that has underpinned the Federal Reserve’s payment system offerings throughout its history,” said President Jeff Schmid.
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