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Cryptocurrency regulation has long been a subject of debate in the United States. Despite the delay in addressing the issue on a broader global scale, there has been some progress on crypto regulation in the United States.
Another milestone on the regulatory front was reached this week. The U.S. Federal Reserve provided guidance to domestic cryptocurrency banks, which are expected to play a larger role in the broader financial system.
Monday’s announcement shows that by allowing the U.S. Central Bank access to Wyoming Special Purpose Depository Institutions (SPDIs) such as Custadia (old Avanti) and Kraken Bank, they will not need an intermediate bank. The Fed and FDIC first submitted guidelines last year and initiated a process to solicit comments. Nearly 300 respondents submitted their views, leading to a second public feedback process earlier this year.
“The new guidelines provide a consistent and transparent process for evaluating requests for Fed and Fed accounts and access to payment services to support secure, comprehensive and innovative payment systems,” Fed Vice Chairman Rael Brainerd said in a statement.”
The guidance is broadly similar to what was first proposed in 2021, and the Fed will create a tiered system that will adjust the access grant evaluation process based on which financial institutions apply. Each tier corresponds to a more rigorous review process.
Different strokes for each bank
Earlier this week, the Fed released a statement describing a possible path for cryptocurrency banks to enter the traditional financial system and operate without intermediaries. In a statement on the same day, Geum Won confirmed that these cryptocurrency banks had finalized guidelines for determining whether they could apply for Fed and Federal Reserve accounts and payment services. They also confirmed that the guidelines will go into effect as soon as they are published in the Federal Register.
The Fed guidelines led to the creation of a three-step system for banks to determine whether they should be permitted to do business. As part of the final draft, institutions with new financial instruments will have access to the Fed’s “Core Account.” The Federal Reserve believes this process will provide a safe, comprehensive and innovative financial system for the United States.
The structure of the system primarily serves as a guide for assessing the potential risks of the applying agency. For Tier 1, the Federal Reserve System (Fed) will classify applicants with Federal Deposit Insurance Corporation (FDIC) coverage. For Tier 2, the Fed will consider applicants who do not have FDIC coverage but are subject to “careful oversight by federal banking agencies.”
What is a three-step structure?
The three-step structure serves as a guideline for assessing an applicant agency’s level of risk.
Under these guidelines, Tier 1 banks will be federally insured.
Tier 2 banks, on the other hand, would not be federally insured, but would still be “subject to careful oversight by federal banking agencies.”
Step 3 is for filing agencies that are “not federally insured and not subject to the close oversight of the federal banking agencies.” This category probably refers to Wyoming cryptocurrency banks such as Custardia and Kraken.
Getting rid of traditional banks?
With Fed approval, cryptocurrency banks will no longer require partnerships with traditional banks that act as intermediaries, and the financial system will be open to these banks. This will give cryptocurrency banks the ability to perform additional functions.
Noel Atchison, head of market analysis at Genesis Trading, hailed the Fed’s decision as a small but important measure.
It’s a small step, but there’s more to come.
With the approval of the U.S. Federal Reserve, cryptocurrency banks no longer need to partner with traditional banking intermediaries when entering the traditional financial space. Third parties and intermediaries will also be alienated, and cryptocurrency banks can now access the Fed’s “General Account” and perform dual functions.
Interestingly, the word “cryptocurrency” is mentioned only once in the 49-page manual. The Federal Reserve has chosen to refer to cryptocurrency banks as institutions that innovate, and that the authorities are in the process of creating an appropriate supervisory and regulatory framework. Nevertheless, there is no objection to the fact that the U.S. Federal Reserve referred to these cryptocurrency banks in its guidelines.
Despite the excitement over these guidelines and what they mean for the industry, some have already warned that they will not necessarily bring quick approval of the type that some crypto-enthusiasts believe. In a statement released according to the guidance, Federal Reserve Chairman Michelle Bowman warned that the guidance was only the first step in the Fed’s goal of providing a broader and more transparent process that would eventually lead to a more inclusive financial system.
However, Bowman was quick to point out that the guidelines do not mean that the vetting process for cryptocurrency banks will now be faster. Serious regulatory challenges remain: banks in the industry should not be expected to gain access to a major U.S. Federal Reserve account simply because they meet certain approval criteria.
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