Fed finalizes 'master accounts' guidance

The Federal Reserve Board has finalized its guidance for novel financial companies to access master accounts, which allow institutions to transfer money directly to other account holders in a network that underpins the global financial system.

The move could encourage fintechs that struggled to get access to master accounts and have sought more clarity on the process. With the new guidance, special-purpose depository institutions such as Custodia and Kraken, which have applied for master accounts, might not need intermediary banks to access the payment rails. 

The finalized guidelines are "substantially similar" to the guidelines posted by the Fed Board in May 2021 and later in March 2022, the agency said. 

The guidelines will create a tiered review system whereby companies that don't have federal deposit insurance and aren't overseen by banking regulators will receive the greatest scrutiny, while firms with deposit insurance and enhanced supervision will receive the greatest degree of deference. Bank trade associations said in their public comments on the proposal that the Fed should include greater clarity about what kind of supervisory obligations might be placed on institutions that are granted master accounts under the revised guidelines.

Federal Reserve Vice Chair Lael Brainard said that the final guidance would go a long way toward providing consistency and transparency around its master account granting process.

"The new guidelines provide a consistent and transparent process to evaluate requests for Federal Reserve accounts and access to payment services in order to support a safe, inclusive, and innovative payment system," Lael Brainard, vice chair of the Fed Board, said in a press release Monday.

The guidelines come a day before a key deadline: The Fed must submit a response to Custodia, a crypto bank based in Cheyenne, Wyo., which has sued the Fed for exceeding a mandatory one-year time period on deciding whether to grant the firm access to a master account. 

The issue also came into the spotlight during the February nomination hearing for Sarah Bloom Raskin, who would have been the regulatory chief at the Fed.  Republicans accused Raskin of helping Reserve Trust, a Colorado-based fintech on whose board she served, obtain one of the master accounts. Raskin has continued to say that she followed ethics requirements, but withdrew from consideration after facing fierce opposition and not obtaining enough support in the Senate.

Some lawmakers and analysts have assailed the Fed's process for granting master accounts, arguing that the variance from regional bank to regional bank has created inconsistency in what kinds of institutions get master account status. Banks, on the other hand, have argued that expanding the universe of who is granted a master account could have a negative effect on financial stability and supervision.

Earlier this year, Sens. Kirsten Gillibrand, D-N.Y., and Cynthia Lummis, R-Wyo., introduced a cryptocurrency bill that would automatically grant any institution with a state banking charter a Fed master account, a prospect that would eliminate the Fed's discretion over account status altogether.  

All Fed board members voted in favor of the guidelines. Fed Gov. Michelle Bowman, however, cautioned that there will be more work ahead before the guidelines can be implemented.

"There is a risk that this publication could set the expectation that reviews will now be completed on an accelerated timeline," she said in a statement that accompanied the Monday release.