The crypto industry continues to remove barriers to entry into the core U.S. financial system, with digital asset exchange Kraken’s approval of limited Federal Reserve accounts marking another milestone that analysts believe could be the first in a trend.
Cryptocurrencies’ entry into the Federal Reserve’s payments system, albeit temporary and limited, has angered traditional banks and created some confusion over the Fed’s ongoing policy on how cryptocurrency companies can access limited “skinny” master accounts. But Kraken co-CEO Arjun Sethi said the development represents “what crypto infrastructure will look like when it matures into core financial infrastructure.”
Payward Financial, Kraken’s Wyoming-based chartered banking subsidiary, was granted access to “limited-purpose” accounts to “tier 3” entrants for one year, according to the Federal Reserve Bank of Kansas City, one of a dozen regional banks in the Federal Reserve System.
“We believe this is the first time the Fed has approved a cryptocurrency entity to obtain a master account, which gives them direct access to central bank payment channels, including Fed Wire,” TD Cowen Washington policy analyst Jaret Sieburg said in a client note Thursday. “Under the president, access to master accounts by crypto entities is inevitable. [Donald] Trump’s support for the cryptocurrency industry. We expect more announcements in the coming months. “
Ian Katz, an analyst who tracks federal financial policy at Capital Alpha in Washington, echoed that sentiment.
“The Fed’s decision could open the door to other cryptocurrency businesses, including Circle, Anchorage and Custodia, a Wyoming-based company that unsuccessfully sued the Fed over its rights to the master account,” he noted.
What does direct access to the Federal Reserve payment system mean for Kraken? Sethi said there is potential for: “instant settlement between fiat and cryptocurrencies, institutional-grade cash management combined with digital asset custody, and programmable financial products built within a fully regulated framework.”
Those running traditional banks in the United States are unhappy with Kraken’s development — the latest threat they flag from the cryptocurrency space.
“Expanding access to Fed direct accounts to institutions operating outside the traditional banking regulatory framework carries significant risks,” Independent Community Bankers of America said in a statement. “The Fed should continue to limit access to master accounts to institutions that meet the highest standards in the financial services industry.”
But Jesse Powell, Kraken’s former CEO and current chairman, celebrated the development.
“We are bankers now,” the Kraken co-founder posted on social media site X. “Get ready.”
Other crypto-related institutions have also sought to enter the Fed’s orbit, including Anchorage Digital, which has sought a full master account that would include earning interest on reserves parked at the Fed, and Erebor Bank, a trust bank that recently received federal approval. The industry also continues to lobby the Federal Reserve for new policy to replace the 2022 guidance on which the Kansas City Kraken decision was based.
At the national level, the Federal Reserve has begun developing new policies to establish what are often called “lite” master accounts for companies that do not require the full suite of traditional master account services. But it’s still early in the process, and if regional Fed banks start approving similar accounts at the same time, it could create uncertainty about what will happen as the new policy is developed.
“This action ignores the public input the Fed solicited on the framework and is opaque about the approval process for the framework or the risk mitigation measures taken to address the material risks it raises,” Paige Pidano Paridon, co-director of regulatory affairs at the Bank Policy Institute, said in a statement.
The Fed’s board of directors in Washington deferred a request for comment this week to Kansas City.
There are more than a dozen regional Fed banks across the United States, each with their own priorities and management, which can cause their decisions on such matters to be inconsistent. Therefore, it is uncertain whether the location of the Fed Center (e.g., Anchorage Digital is in Minneapolis, Erebor is in Cleveland) affects its results.
Kansas City Fed President Jeff Schmid said the Kansas City Fed will continue to work with businesses there to “help ensure that access to payment systems supports a level playing field and enhances the stability and resiliency that have underpinned the Fed’s historical payment system offerings.”