Kraken Financial Approved for Limited-Purpose Master Account by Kansas City Fed
The Federal Reserve Bank of Kansas City recently made a landmark decision by approving a limited-purpose master account for Kraken Financial. This approval allows the cryptocurrency exchange to directly access the central bank’s payment network, making Kraken the first digital asset bank to do so. The news release from Kraken underscores the significance of this milestone in the history of digital asset banking in the U.S.
However, this move has drawn backlash from traditional banking groups. They argue that this decision introduces significant illicit finance and systemic risks to the traditional financial system while bypassing the Federal Reserve Board’s rulemaking process. As Brooke Ybarra from the American Bankers Association warns, “This action puts the cart so far ahead, that the horse will never be able to catch up.”
The Approval Process
Kraken Financial’s approval for a limited-purpose master account by the Kansas City Fed is the culmination of a five-year process. The firm originally applied for the account in October 2020. This approval comes before the Federal Reserve Board has finalized its policy framework, as per a statement by Paige Pidano Paridon from the Bank Policy Institute. The board had sought public input on a “payment account” prototype for institutions focused on payments innovation in December. However, the timeline for the finalization of rules for these accounts is yet to be provided.
Understanding ‘Skinny’ Accounts and SPDIs
The “skinny” account, officially known as a payment account prototype, is tailored to institutions focused on payments innovation. Unlike traditional master accounts, these limited-purpose accounts do not pay interest on overnight balances and prevent daylight overdrafts and access to the Fed’s discount window.
Kraken holds a special-purpose depository institution (SPDI) charter, created by Wyoming legislators in 2019. This state charter enables Kraken to receive U.S. dollar deposits and custody digital assets, but strictly prohibits the firm from making loans. Instead, the law requires SPDIs to back 100% of customer deposits with cash or high-quality liquid assets.
Kraken: A Directly Connected Financial Institution
The master account approval allows Kraken to settle U.S. dollar transactions directly on Fedwire, bypassing the need for an intermediary bank. Such direct connectivity can facilitate faster fiat movement for institutional clients, reducing costs, complexity, and operational dependencies. Arjun Sethi, co-CEO of Kraken, views this as a significant milestone, marking the convergence of crypto infrastructure and sovereign financial rails.
Opposition from Traditional Finance
Banking trade groups have voiced their opposition to the Kansas City Fed’s decision. They argue that granting uninsured institutions like Kraken direct access to central bank payment systems can introduce significant risks. The American Bankers Association and the Bank Policy Institute express concerns about illicit finance risks, potential drain of institutional assets from traditional banks, and the undermining of the regulatory and supervisory framework.
Controversy Over Lack of Transparency
The Kansas City Fed approved the limited-purpose account with certain “restrictions and limitations” specific to Kraken’s risk profile. However, the specifics of these restrictions remain undisclosed due to business confidentiality, sparking criticisms over transparency. Todd Baker from Columbia University’s Richman Center described the confidentiality surrounding the account’s risk mitigants as “politically inappropriate.”
The Changing Landscape of Digital Asset Policy
The approval of Kraken’s limited-purpose master account signifies a dramatic shift in digital asset policy in Washington. Amid changing regulatory climate, Kraken also benefited from the Securities and Exchange Commission dropping its civil enforcement action against the cryptocurrency exchange last year. This change in the regulatory environment indicates a thawing of the “deep freeze for crypto,” according to Stephen Gannon, a partner at the law firm Davis Wright Tremaine.
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