Bank regulators have been looking at crypto in a new light since President Donald Trump returned to office, but a new set of directives from the White House could test the limits of their newfound openness to digital assets.
The president's Working Group on Digital Asset Markets released a lengthy report last week detailing the state of the U.S. crypto industry and prescribing regulatory reforms, including changes to how the Federal Reserve
The report urges the Fed to establish clearer guidelines for how crypto depositories can obtain master accounts, which grant access to the Fed's payments rails and other financial services. It also calls for a fixed timeline for master account application processing. Restricting stablecoin and crypto access to master accounts was a key lobbying message for the banking industry as lawmakers wrote their stablecoin law, and as they continue to write the market structure bill.
Despite the White House report's pro-crypto messaging, the actual recommendations didn't go far enough for some of its industry backers.
Julie Hill, dean of the University of Wyoming College of law and a leading scholar on master account policy, said the recommendations were "middle of the road" proposals that fall short of where many digital asset proponents had hoped they would land.
Specifically, Hill said, the report does not assert that all chartered depositories are entitled to master accounts, an argument championed by Custodia Bank, a Wyoming digital asset bank that has been engaged in a yearslong legal battle with the Fed over master account access.
"If you're going to have an application process for this, there ought to be some clear rules and it ought not take forever, it's pretty hard to oppose those elements," Hill said. "What you don't see here is the argument that Custodia is making, which is that master accounts are a matter of rights."
Instead, the report seems to suggest that master account access is a "matter of discretion," Hill said. That answer is "probably not the answer that a lot of the fintechs, stablecoin issuers and non-traditional business models and non-traditional banking charters want to hear," she said.
Custodia founder and CEO Caitlin Long, who spoke to the President's Working Group as it compiled its report, said it was striking that the paper did not weigh in on master account entitlements or take a position on the various pending master account applications — including the one from her organization — but it was not altogether surprising.
Long sees the working group's light touch approach to master accounts — as well as chartering practices and deposit insurance — as an intentional effort to give Fed Vice Chair for Supervision Michelle Bowman and other newly appointed regulators room to set their own policies. She added that the working group avoided getting ahead of the U.S. Court of Appeals for the 10th Circuit, where the Custodia and the Fed are currently litigating the matter of master accounts.
"It's a deference to the courts on master accounts and, on chartering, it's a deference to their new appointees who have only been in their jobs for a short period of time," Long said.
Crypto policy in flux
Trump's return to the Oval Office has ushered in a sea change for digital asset policy in Washington. That shift has been evident within the Fed as well as the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, all of which have
Throughout this year, the regulators have carved out a new posture toward crypto by rescinding their
The combination of Trump's
"It really does reflect evolving thinking and the evolving status of the crypto industry," Powell said. "And I would expect, over time, we'll see more activity."
But how this evolution applies to the Fed's master account practices is far from certain.
The Fed's call
Michele Alt, a partner at the consulting firm Klaros Group, said the lack of specificity in the White House report's master account recommendations implies that the Federal Reserve System will retain its current level of discretion over payments system access.
"There was an assumption that the crypto banks that have pending charter applications with the OCC will just automatically get master accounts, but it turns out that's not something they should automatically assume," Alt said. "It depends on the Fed, the Federal Reserve Banks, it's their call. And I have not seen anything out of the Fed indicating any kind of renewed thinking here about master accounts. They've been pretty quiet."
Recent years have seen the central bank take a more guarded approach toward its master account policies than it had in the past, a shift ostensibly related to elevated concerns about money laundering through the banking system and the proliferation of novel payment technologies.
As a result, the typically perfunctory process of obtaining a master account has become complicated and drawn out for the rising number of non-traditional banks and financial entities seeking entry into the payments system. This has led to multiple lawsuits from
In light of these challenges, the Fed codified its master account
A tale of two tier 3s
The review framework makes no mention of crypto, but Custodia's focus on the novel asset class appears to have contributed to the Fed's reluctance to grant it a master account.
In January 2023, the Federal Reserve Board rejected the bank's bid to become a member institution. It cited the firm's "unprecedented business model" and its heavy involvement in crypto, which the board said presented "heightened illicit finance and safety and soundness risks."
While separate from the master account decision, which is made by the Fed system's 12 regional reserves, in this case the Federal Reserve Bank of Kansas City, the membership denial cemented Custodia's tier 3 status.
The Kansas City Fed's rejection of Custodia's master account request opened the question of whether a tier 3 bank could obtain an account or if the designation was a death sentence. The New York Fed shone some light on that topic last year when it
Yet, while Numisma proved that a tier 3 bank can obtain a master account, little is known about why exactly it succeeded where Custodia failed. Alt said the president's crypto working group could have called for that additional clarity but chose not to. Her hope is that the Fed picks up the report's pro-innovation spirit and reforms its assessment practices accordingly.
"What's needed is a little more definition about what the scrutiny levels entail," Alt said. "Tier 3 is the strictest scrutiny. OK, what are they looking at? What does an applicant need to show to survive that scrutiny, to demonstrate that they are responsible players who can be trusted with a master account? More clarity is needed around the actual standards, and certainly the timeline."
Focus on innovation
The Fed has shown some willingness to amend its master account practices in response to the government's growing embrace of crypto.
Earlier this year, Powell pledged that the central bank would
But even that minor adjustment came after the normally private guidance was made public during a
Crypto has not been among the top stated priorities for Bowman, who was
Stephen Gannon, a partner at the law firm David Wright Tremaine who specializes in crypto policy, said Bowman's focus on innovation will likely result in more accommodative policies toward digital assets.
"One of the things I know Vice Chair Bowman is very, very focused on is innovation and how that's going to impact the Fed's mission and role going forward," Gannon said. "I think she would do her very best to balance the needs of community banks, the banking system as a whole and the new developments that are being driven by technology, including artificial intelligence, blockchain and digital assets."
Yet, how much say Bowman has over the matter is unclear.
Regulation or not?
Historically, the Fed has not viewed master accounts as part of its regulatory or supervisory functions. Instead, it has treated them as part of remit as payments system operator, a role that bleeds into its jurisdiction or financial system stability. Because of this, former Vice Chair for Supervision Michael Barr did not play a leading role in the master account guidelines that were developed during his tenure as the Fed's top cop.
Some legal scholars and policy experts have argued that — given the enhanced scrutiny of the review process and the degree to which banks rely on payments system access for their viability — master account oversight has become a regulatory matter and should be treated as such.
If the Fed does reclassify its master account oversight as a regulatory matter, the ramifications could be significant, especially under the Trump administration's assertion that bank regulation should be coordinated through the executive branch rather than handled independently by each of the three agencies.
The working group's report provides some evidence that the administration already views payment system access a regulator matter, as it lumps master account policy in with chartering and deposit insurance, both of which are clearly within the regulatory realm. The focus on transparency also aligns with the White House's general approach to regulation.
Further complicating the matter is the fact that master account decisions are made by the reserve banks, which are technically private entities. While the Board of Governors oversees the 12 regional reserves and sets guidelines for master account decisions, Powell and other Fed officials have maintained that the Washington-based entity has no direct say in which applications get accepted and which get rejected.
Hill said there are reasonable arguments both for and against classifying master accounts as a regulatory matter. On one hand, if there is a lot of agency discretion involved, she said it makes sense for the public to have some kind of say over how it is applied. On the other hand, making it overtly political increases the likelihood of partisan policy swings.
"It seems that the Trump White House is in favor of crypto, just as the Biden White House was quite skeptical of it," she said. "It's an interesting thought experiment to think about what this might look like in the next administration and whether or not that's a good way for financial regulation to be done."
