On August 15, the Federal Reserve Board (Fed) issued final guidelines, outlining the tiered approach it will use when evaluating the growing requests from fintech firms and cryptocurrency companies for access to master accounts. The guidelines make clear that while requests from institutions with federal deposit insurance will be subject to a streamlined review, institutions that engage in novel activities, such as cryptocurrency, will undergo a far more extensive one. More subtle but perhaps most important, the Fed did not change the basic requirement that an applicant has to be a “depository institution” as defined in 12 U.S.C. Section 461 to be considered an eligible institution, which effectively limits these accounts to insured or uninsured banks, credit unions, or similar institutions.

“The new guidelines provide a consistent and transparent process to evaluate requests for Federal Reserve accounts and access to payment services in order to support a safe, inclusive, and innovative payment system,” said Vice Chair Lael Brainard.

  • Tier 1: Eligible institutions that are federally insured.
    • These institutions are already subject to a strict set of federal banking regulations and will be generally subject to a less intensive more streamlined review.
    • These are eligible institutions that are subject to ongoing federal banking agency regulation.
  • Tier 2: Eligible institutions that are not federally insured but are subject by statute to prudential supervision by a federal banking agency, such as the OCC, FDIC, and National Credit Union Administration.
    • These institutions will be subject to an intermediate level of review.
    • These eligible institutions are also subject to ongoing federal banking agency regulation.
  • Tier 3: Eligible institutions that are not federally insured and are not considered in Tier 2.
    • These institutions will be subject to this strictest level of scrutiny.
    • These are institutions, like Wyoming special purpose depository institutions, that are not subject to ongoing federal banking agency regulation.

While the guidelines broadly outline considerations for evaluating requests, the Fed made clear that they are not intended to provide assurance that any specific institution will be granted access. Instead, the Fed will evaluate each request on a case-by-case basis. And, even if access is granted, the Fed is within its discretion to impose additional risk management controls, such as real-time monitoring of account balances, as it deems necessary to mitigate risks.

In a targeted supervisory letter issued the very next day, the Fed cautioned, “The emerging crypto-asset sector presents potential opportunities to banking organizations, their customers, and the overall financial system; however, crypto-asset-related activities may also pose risks related to safety and soundness, consumer protection, and financial stability.” Given these risks, the Fed announced it is closely monitoring crypto asset-related activities and advised any supervised banking organization to “have in place adequate systems, risk management, and controls to conduct such activities in a safe and sound manner and consistent with all applicable laws” prior to engaging in such activities.

When the Fed announced its tiered approach in March of this year, a group of trade organizations, including Bank Policy Institute, The Clearing House Association LLC, American Bankers Association, Independent Community Bankers of America, Mid-Size Bank Coalition of America, and Consumer Bankers Association (the Organizations), issued a comment letter, raising significant concerns that the Fed’s proposal does not appropriately and transparently address how it will resolve many of the issues that an application by a novel charter is likely to raise. Specifically, the Organizations asked the Fed to clarify:

  • Which institutions are eligible to apply for master accounts and services;
  • How applications will be reviewed and scrutinized, and what conditions and limitations may be imposed in connection with approval at each tier; and
  • How Federal Reserve Banks will oversee and monitor institutions at each tier on an ongoing basis after granting an application for an account.

The Organizations went on to state that their concerns stemmed from two key principles. The first being that it is crucial the Fed ensures “that the guidelines are applied consistently” by “exercising ultimate oversight of most decisions involving Tier 2 and Tier 3 applicants.” These concerns may still be at play as the final guidelines left many of these concerns unanswered. The Organizations went on to say that “[s]econd, given the privileges afforded by access to accounts and services and the risks that could be posed to the payment system, the U.S. financial system and the overall economy, the guidelines should ensure that all institutions with access are held to an equally high standard of supervision and oversight to ensure their safety and soundness and compliance with other relevant laws regardless of charter type or business model.” It appears the Fed was also concerned with this factor.

Troutman Pepper will continue to monitor important developments involving the Fed and the cryptocurrency industry and will provide further updates as they become available.