The crypto banks and other fintech institutions now have tiers of guidelines to be followed as the Federal Reserve's governing board releases them.
The board of governors of the Federal Reserve System (Fed) has released new guidelines that will standardize applications for master accounts from organizations that have novel charters.
These guidelines apply to cryptocurrency banks and other cryptocurrency trade or industry groups.
Institutions can obtain direct access to the Federal Reserve's payment systems by opening reserve bank master accounts. Without access to this information, businesses are forced to form partnerships with other financial institutions that hold master accounts.
A number of crypto custody banks based in the United States have, for the past few years, been advocating for direct access to master banks.
With these guidelines in place, institutions can now have more independence in their operations as long as they implement the regulatory measures.
These crypto businesses can now avoid working with conventional banks as intermediaries.
Crypto's Banking Guidelines for Master Accounts
The guidelines establish a review framework consisting of three levels. However, the level of due diligence given to an institution will continue to vary according to the risk level of the applicant.
In recent years, crypto-related financial institutions or similar types of financial products have increased tremendously.
The Fed stated that as the increase in numbers rises, many of these institutions have requested access to the accounts and payment services provided by the Federal Reserve Banks. These accounts are frequently referred to as "master accounts."
It is stated that the established guidelines are a risk-based, transparent, and coherent set of parameters for reserve banks to use in evaluating applications to access Federal Reserve accounts and payment services.
To further clarify the level of vigilance and scrutiny reserve banks would apply to various types of institutions with various levels of risk, the new rules contain a tiered review approach.
According to the Federal Reserve, "For example, institutions with federal deposit insurance would be subject to a more streamlined level of review, while institutions that engage in novel activities and for which authorities are still developing appropriate supervisory and regulatory frameworks would undergo a more extensive review."
The recently released guidelines from the Feds are close to the proposed guidelines by the Board in their May 2021 and March 2022 proposals.
The tiered review approach that was included in the final guidelines was improved as a response to comments made by the general public.
This revision was done to give a more equal level of treatment between non-federally-insured institutions chartered under state law and federal law.
Crypto and FinTech's Future
However, despite this being a victory for innovation, the looming Web3 industry, and the crypto industry, it appears that not everyone is pleased with the idea of crypto custody banks being permitted access to master accounts.
According to Crypto News, "The Fed claimed that during the consultation period on its proposed guidelines, many commenters pointed to 'fintech'-related business models and other novel special-purpose charters as posing heightened risk to the payment system and financial markets."
Michelle Bowman, a Governor of the Federal Reserve System, noted that additional work needs to be done before a mechanism can be formed to properly apply the principles.
Bowman also offered a few warnings, indicating that although the standards will improve consistency and transparency, they are simply the first step toward a transparent application process.
In addition to this, she gave the impression that the Federal Reserve and other reserve banks would not rush through the process of evaluating applications from the cryptocurrency business.
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