- Key insight: So-called “skinny” Fed accounts could grant direct Fed-rail access to crypto-focused banks.
- What’s at stake: Banks relying on BaaS revenue risk disintermediation and margin pressure.
- Forward look: The Fed will propose a rule, solicit comments, and could finalize it within roughly a year.
Source: Bullets generated by AI with editorial review
The idea of a “skinny” master account that would give some crypto companies and fintechs quick yet limited access to the Federal Reserve’s payment rails is gaining traction in the crypto world, but is also making banks who rely on banking as a service as a revenue stream nervous.
Federal Reserve Gov. Christopher Waller, who chairs the central bank’s payments committee, recently
Companies in this category include Anchorage Bank, which has a national trust bank charter from the Office of the Comptroller of the Currency, Erebor Bank, which has a de novo national bank charter from the OCC, and Custodia Bank and Kraken Bank, which have special purpose depository institution charters from the state of Wyoming.
The skinny master account would lack access to overdrafts and the Fed’s discount window, it would be subject to balance caps, and it would receive no interest on balances.
“The idea is to tailor the services of these new accounts to the needs of these firms and the risks they present to the Federal Reserve Banks and the payment system,” Waller said in his October 21 speech. “Accordingly, and importantly, these lower-risk payment accounts would have a streamlined timeline for review. Payments innovation moves fast, and the Federal Reserve needs to keep up.”
Who will receive skinny accounts
In an interview with
Some industry observers were surprised that Waller referred to trust banks as depository institutions. Trust banks are focused on fiduciary services, such as managing assets on behalf of clients. Some do not accept deposits, and therefore don’t have to apply for FDIC insurance.
“This means that OCC trust companies have a structural advantage over every depository institution, including Wyoming SPDIs,” Caitlin Long, founder and CEO of Custodia Bank, told American Banker. “We did not see that one coming, because Wyoming was so careful to meet the depository institution rules.”
Overall, the Fed’s skinny master account concept is “a positive, no question,” Long said. “But for Wyoming, which really worked hard with the Fed beginning in 2018, now to see this all happen and a capital arbitrage open up,” is disheartening. “Our SPDIs are better capitalized, and we’ve spent years complying with bank regulation, and now all these trust companies get in with less capital and less regulation. It’s not a pleasant thing.”
Custodia Bank applied for a Fed master account in 2020 and was
Custodia’s leaders say it has passed its AML/BSA exams. “We’ve spent tens of millions of dollars building a compliant bank, and for the first three years we worked collaboratively with the Fed,” Long wrote in a LinkedIn post. “More importantly, we have consistently delivered a clean compliance record (note: we’ve had successive full-scope bank exams). So why would the Fed continue to refuse us? Or admit others in an expedited approval channel?”
Custodia sued the Federal Reserve over master account access in June 2022. The case is still pending in the Tenth Circuit.
Regulators have changed their tone in the past year, and crypto-focused companies that regulators would once have considered risky are now receiving trust and
Asked specifically how the new skinny master account concept would affect the Custodia case as well as fellow Wyoming SPDI Kraken, Waller told Crypto in America, “we can kind of look at the structure. One of the things we’re always concerned about is AML and money laundering. When you have proper controls in place, how are you going to monitor this stuff? How can we do it? Are the regulators going to have the right models? And then we can say, look, because we’re limiting the risk you pose to us, we’ll have a much faster and quicker approval process, easier and quicker approval product. We won’t take six years now to go to court.”
The Wyoming SPDIs and companies with national trust charters will be legally eligible for skinny master accounts, Waller said. “They can request,” he said. “It doesn’t mean you get one, let’s be clear. It just says you’re able to request.” Which firms actually receive a skinny master account is at the Fed’s discretion, he said.
Roman Goldstein, senior director at Klaros Group, thinks Custodia may receive the new Fed account.
“The Fed knows that Custodia is going to be first in line for a skinny master account,” Goldstein told American Banker. “And my guess is they’re hoping Custodia is first in line, and then they can dismiss the lawsuit.”
He expects Anchorage Digital Bank and Erebor Bank to be close behind. In August, the OCC lifted its consent order against Anchorage Digital Bank, which had accused the bank of inadequate AML/BSA controls. Anchorage launched its own stablecoin in June and serves as a crypto custodian to asset management firm Blackrock. Anchorage also offers global U.S. dollar wire transfers.
Anchorage Digital Bank’s leaders are cautiously optimistic about the new Fed accounts.
“Skinny master accounts would mark a significant step forward in regulatory innovation,” Rachel Anderika, chief operating officer of Anchorage Digital Bank, told American Banker. “Today, crypto and fintech firms are forced to navigate an intricate web of correspondent banking relationships. That sort of complexity can be a breeding ground for regulatory risk and operational uncertainty. Providing direct access to Fed rails would strike the right balance by driving payments innovation, while advancing the safety and soundness of the banking system.”
This would help crypto firms become more efficient, provide better oversight structure for regulators and provide more certainty for institutions and consumers, she said.
“At the end of the day, the proposal is a clear signal that the federal banking regulators are serious about driving payments innovation and the strength of the U.S. dollar in the digital age,” Anderika said.
Anchorage has already applied for a traditional master account. A skinny master account “would be a significant unlock for working with our institutional clients, providing any kind of payments services, and potentially support our federally regulated work in stablecoin issuance,” Anderika said. “If you think about it, minting and redeeming stablecoins is really all about money movement — in our case, moving U.S. dollars on- and off-chain. There is no better instrument for this sort of core payments activity than a master account.”
Erebor is being created by a group of tech billionaires led by Anduril co-founder Palmer Luckey and including tech investor Peter Thiel and Palantir co-founder Joe Lonsdale, aims to serve the “innovation economy,” particularly companies in crypto, AI, defense and manufacturing, by providing services like deposits, payments, and lending within a digital asset framework. Erebor received national bank approval from the OCC on Oct. 15, just over 120 days after applying. An Erebor Group executive did not immediately respond to a request for comment.
Before the decisions about who gets a Fed master account can be made, the Fed will put out a proposal, take comments on the proposal, then finalize the proposal. The Federal Reserve Banks will decide who gets an account and who doesn’t.
“But the idea is not to take two or three years to do this,” Waller said. “The idea would be, if we could do this in a year, I think that’d be fantastic.”
Living on a thin line
Meanwhile, Custodia is soldiering on without a Fed master account. It’s partnered with Vantage Bank. Last week, the two companies launched a tokenized deposit venture, through which they’re offering tokenization to community and regional banks.
According to Long, this is offered through a widget with a lightweight integration into a bank’s core system. “They don’t need to make a multi-year commitment to a technology provider,” she said. “It should be immediately accretive.”
Vantage Bank, which is based in San Antonio, provides cross-border payments for multinationals that do business in Mexico. “There’s a lot of demand for being able to get faster, cheaper cross-border payments,” Long said.
Local construction companies have reached out because they want to be able to pay their subcontractors when they hit a milestone, as opposed to having to go through a delayed invoice and payment process, Long said. “They just want it to be automated,” she said.
Custodia and Vantage also built an app for DX Express, a Mexican trucking company whose CEO wants to be able to pay his drivers within an hour after they reach their destination.
“He thinks that he’ll be able to recruit the best drivers that way, as opposed to a lot of trucking companies that pay 30 days later,” Long said. “There’s a lot of financial distress in the logistics industry, and the drivers are selling their receivables at a discount, and it’s a lot easier if they can get paid instantly.”
Vantage is also working with a restaurant company that wants to be able to pay its workers daily.
“It’s changing domestic business models and how fast people get paid for services as well,” Long said.
Custodia and Vantage tested their tokenized deposit in March through June with small transactions. The banks still need final regulatory approval to scale up from the Dallas Fed and Texas and Wyoming state regulators.
“But we’re very far down the path, and we should be launching it in Q1,” Long said.
Bad news for BaaS banks
The new skinny master account could put a damper on some traditional banks’ banking-as-a-service plans.
“A lot of the banking-as-a-service banks’ business model is essentially serving as a gatekeeper to the payment system, and if you give these payments companies direct access to the payment system, they don’t need to go through the banking-as-a-service banks,” Goldstein said.
If many nontraditional banks receive skinny master accounts, community banks offering banking-as-a-service may have to shift their efforts.
“Community banks face a big strategic challenge over the next five years or so,” Goldstein said. “There’s going to be more competition in payments, which is going to shrink margins. The ones that have a payments heavy business model, like the banking as a service gatekeepers, might find themselves disintermediated.”
Potentially they could offer more lending services. But many fintechs also offer lending, which doesn’t require a bank charter, but rather state lending licenses.
That said, Goldstein said he is “heartened that the Fed is willing to think about new ways of accomplishing its objectives, or even think about new ways of getting things done.”