On January 27, the Federal Reserve Board (FRB) announced that it unanimously voted to deny a crypto firm’s application to become a member of the Federal Reserve System. This denial ends the crypto firm’s 27-month effort to obtain a “master account,” which allows companies to move money through the Federal Reserve System without having to use a federally insured bank.
While not federally-insured, the crypto firm is chartered in the state of Wyoming and operates as a special purpose depository institution. The crypto firm offers a variety of financial services for both U.S. dollars and digital assets, including banking services, custody services, and escrow services. The crypto firm markets its services as tailored to business customers who transact with digital assets that are looking for enhanced regulatory clarity and minimized transactional risk.
In issuing this denial, the FRB noted that the firm’s novel business model and proposed focus on crypto assets presented significant safety and soundness risks. In particular, the FRB expressed concern that the firm proposed to issue crypto assets on open, public, and decentralized networks. The FRB also stated that the crypto firm’s risk management framework was insufficient to address concerns regarding the heightened risks associated with its proposed crypto activities.
Putting it into Practice: This rationale reinforces a recently issued joint statement by the FRB, the FDIC, and the OCC expressing concern over crypto assets and advising caution to due to the various risks that such assets pose to banking organizations. In their joint statement, the federal regulatory authorities stated that crypto assets are likely to be inconsistent with safe and sound banking practices and expressed a commitment to ensuring that risks associated with the crypto asset sector do not migrate to the banking system. The growing concern from federal regulators regarding the soundness of crypto assets mirrors the similarly narrowing focus of state regulators in recent months (see previous blog posts here, here, and here). Companies whose business models involve crypto assets, particularly depository institutions, should continue to be aware of this ongoing regulatory convergence to rein in the crypto asset sector to ensure safety and soundness of financial institutions.