A Federal Reserve Governor has effectively acknowledged that the tier of master account applications targeted by firms like Custodia Bank was never a realistic path to approval. Speaking at the American Bankers Association (ABA) conference yesterday, Fed Vice Chair for Supervision Michelle Bowman addressed the Kansas City Fed’s decision last week to grant a master account to Kraken Financial, a Wyoming special purpose depository institution (SPDI) affiliated with the crypto exchange.
The grant drew immediate objections from the major banking associations. ABA CEO Rob Nichols pressed Bowman on whether it was a standard “Tier 3” account or a so-called “Skinny” payments account, and if the latter, why it had been approved before the Skinny rules were finalized.
Bowman’s characterization of Tier 3 applications as “unobtanium” was the most revealing moment. Tier 3 covers applicants that are neither federally insured nor federally supervised, the category that firms including Custodia Bank spent years and significant resources pursuing. When Bowman added “you just can’t qualify. It doesn’t work,” the implication was hard to miss: the route was more or less closed even as companies were applying.
The Skinny account concept, which the Fed is formally calling “payments accounts”, emerged in part from the recognition that some non bank financial institutions need limited access to Fed infrastructure. The Fed published its plans and a request for comment in late December. Kraken Financial qualifies as a Wyoming SPDI, meaning all deposits are fully backed and it does no lending. Bowman noted that payments accounts are primarily Governor Waller’s domain, but described the Kraken approval as something closer to an experiment.
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