What do the Fed’s proposed standards for new types of institutions mean for crypto banks?

This article is from The Block, original author: Kollen Post

Odaily Planet Daily Translator | Yu Shunsui

• The Federal Reserve is seeking comment on how to evaluate requests from financial institutions with new types of charters to access central bank system accounts and services.

• This seems like great news for the crypto space. But how good is it?

• The developments come as the Office of the Comptroller of the Currency (OCC), the top U.S. bank regulator, shakes up its leadership.

Earlier this month, the Federal Reserve outlined a proposed set of new criteria for evaluating “novel institutions” that want access to the Fed’s payment and account services.

At this point, the guidance is just a proposal and has not yet come into effect. It will be open for public comment for 60 days, at which point it will undergo a revision process that could take months or longer. However, the act of making the new draft standard public does indicate a genuine interest in expanding its service reach to non-traditional players, especially those using emerging technologies, and providing them with financial services.

As the central bank of the United States, the Federal Reserve is the hub through which the country's financial institutions transact with each other. For example, they need to have an account at the Fed to use the Automated Clearing House (ACH).

Some nonbanks work with federally chartered banks to get Fed services, but that adds another layer of delays and fees. This is a dilemma crypto companies have long faced. From the perspective of advocates, it undermines the technology’s potential efficiency by involving a third party.

This situation is at the heart of the OCC’s push to expand its fintech charter and offer banking licenses to companies like Anchorage, Protego, Paxos, and others, much to the excitement of supporters and stakeholders in the industry.

The guidance itself acknowledges technological advancement in general. "The payments landscape is evolving rapidly as technological advances and other factors lead to the introduction of new financial products and services, as well as different ways of providing traditional banking services. Relatedly, there has been a recent increase in new types of charters being approved or considered across the country, and as a result, the Federal Reserve has received an increasing number of inquiries and requests from new types of institutions for access to accounts and services."

There is no direct mention of cryptocurrencies, and the Fed does not identify companies or specific technologies throughout the document, nor does it use broader phrases such as "financial technologies" or "fintech." Regulators like the buzzword "tech-neutral," which may explain why the Fed's guidance is somewhat ambiguous. When The Block contacted the Fed for comment, a representative also declined to confirm or deny that any chartered agency or company was involved in promoting the initiative.

So what are these new institutions?

But there are people from the crypto industry itself who have confirmed their involvement.

Kraken Bank CEO David Kinitsky noted in a statement that the company’s Wyoming-chartered bank is “exactly the type of forward-looking license that the Federal Reserve’s recent guidance is designed to address.” He further confirmed the company’s intention to “move forward with our own master account application.”

U.S. Senator Cynthia Lummis was also quick to point to Wyoming’s crypto-friendly Special Purpose Depository Institution (SPDI) charter as a reminder of the Fed’s guidance. “Wyoming has developed the best regulatory framework for digital assets in the country. I am proud of the Federal Reserve’s thoughtful consideration of Wyoming’s leadership.”

But with the OCC’s federal charter, the relationship is less clear. Anchorage, the first digital asset company to receive a national bank charter, declined to comment on the new guidelines. A representative for Paxos, which operates out of the Bank of New York Trust and received conditional approval of its charter from the OCC in late April, said the company had no advance notice of the Fed’s proposal.

The different outlooks for national and state licenses

For its part, the OCC is facing changes at the management level. U.S. Treasury Secretary Janet Yellen last week appointed Michael Hsu as the new acting director, with May 10 being his first day on the job.

Despite the fact that it was the Obama-era OCC that first pushed for the creation of a national fintech charter, the process accelerated significantly last year under the leadership of Brian Brooks, whose work during his tenure has a solid position in the crypto community. He joined the OCC after leaving the Coinbase legal team and became the CEO of Binance US after leaving office.

Unfortunately for Brooks, regarding fintech licenses, he became the target of anger from congressional Democrats on the U.S. House Financial Services Committee. With the end of former U.S. President Donald Trump’s term, there was strong political pressure to undo the previous actions of Brooks and former OCC Director Joseph Otting.

On May 11, the U.S. Senate passed a resolution to repeal Brooks’ “True Lender” rule, which is expected to face minimal resistance in the House of Representatives. The House Financial Services Committee has already signaled similar opposition to the OCC’s recent charter.