Wyoming’s special-purpose depository institutions — state-chartered banks that can custody digital assets and provide banking services to crypto-related businesses — have almost everything they need to go live. They have received state banking charters, built infrastructure, hired people and in March, received their ABA routing numbers.
But the one final piece they need — master accounts at the Federal Reserve that will give them access to its payment rails — has eluded them for two and a half years.
Their applications sit at the Fed as the central bank and industry participants debate who, besides federal insured depository institutions, can access the Federal Reserve’s payments systems.
The Fed floated proposed payment system access guidelines with requests for comment in May 2021 and again in March 2022. Both versions have the Fed taking a sterner look at, and potentially imposing stricter risk management controls on, financial institutions that lack Federal Deposit Insurance Corp. insurance and that are not supervised by federal regulators, such as Wyoming’s SPDIs. On Friday, the last day of the second comment period, several bank groups raised questions about and objections to giving such access to companies with “novel charters.”
In their comment letter, the American Bankers Association, Bank Policy Institute, Consumer Bankers Association, Independent Community Bankers of America, Mid-Size Bank Coalition of America and The Clearing House Association Institute said the proposed guidelines “fail to answer who is legally eligible to apply, how applications will be reviewed, how compliance will be monitored and what measures are in place to ensure guidelines are enforced consistently among reserve banks.”
The Fed doesn’t have a timeline to finalize the payment system principles. It’s unlikely that the Wyoming SPDIs will be approved until that happens. The Kansas City Fed, the branch with jurisdiction in Wyoming, did not respond to a request for comment.
Meanwhile, time is running short for Wyoming SPDIs like Custodia Bank, which was founded by Caitin Long and recently rebranded from its original name, Avanti Bank, and Kraken Bank. Both received Wyoming SPDI charters in 2020. A third special-purpose Wyoming bank, Wyoming Deposit & Transfer, received its SPDI license last July. When Kraken and Custodia applied for Fed master accounts, the application said “processing may take 5-7 business days.” The Fed removed that language from its master account application two weeks after Custodia applied to become a Fed member bank.
Companies in Wyoming are burning capital. They have to pay their employees while they’re still in nonoperating status.
Sen. Cynthia Lummis (R-Wyoming) brought the matter up during Fed Chair Jerome Powell’s confirmation hearing in January.
“I’m terribly concerned about the manner in which Wyoming’s SPDIs are being treated by the Federal Reserve,” Lummis told Powell. She said the Fed does not have a legal right to deny master accounts to SPDIs, and accused it of a strategy of “deny by delay” and “starving the applicants until they die.”
Powell said he saw good arguments for approving the SPDI applications, but that letting these companies join the Fed could set a precedent.
“If we start granting these, there will be a couple hundred of them soon,” he said. “They’re hugely precedential, which is why I’m taking my time on this.”
Champions of the SPDI charter are hopeful the Fed will vote soon to approve the new payment system access guidelines, and that then the central bank will greenlight the Wyoming SPDIs.
The issue over access to the payment rails
Getting a master account at the Fed gives a company entree to the Fed’s payment system. Without such an account, companies have to partner with a traditional bank to use Fed services like ACH and Fedwire.
Some say the Fed’s authority, granted under 12 USC 248 and 12 USC 342, does…
Read More: Patience wears thin in Wyoming as crypto banks await Fed approval