The Federal Reserve's crypto guidelines prompt whistleblower

On 15 August, the Federal Reserve announced it had finalised guidelines that would provide firms, including crypto banks and stablecoin issuers to access the Federal Reserve's accounts and payment services commonly known as a 'master account'. 

Here is the catch: the likelihood of getting access to a 'master account' will ultimately depend on how federally insured applicants are, but crypto firms are not federally insured.

The Federal Deposit and Income Corporation (FDIC) only protects charter banks such as JP Morgan and their depositors against the loss of their deposits up to $250,000. 

According to the FDIC: "FDIC insurance does not protect a non-bank’s customers against the default, insolvency, or bankruptcy of any non-bank entity, including crypto custodians, exchanges, brokers, wallet providers, or other entities that appear to mimic banks but are not, called neobanks.”

In response to the guidelines, Amanda Thompson, a spokesperson for Senator Pat Toomey (R-Pa.) said that the guidelines were "absurd" since a master account is a "public good". 

This is where things get interesting.

Following the unveiling of the Federal Reserve's guidelines, Senator Pat Toomey,  sent a letter to the FDIC on Tuesday 16 August, after whistleblowers had informed him that the FDIC may be deterring banks from doing business with crypto companies. 

In a  letter obtained by AltFi that was sent from Toomey to Jay Lerner, the inspector general at the FDIC: "according to whistleblower communications [...] the FDIC's Washington D.C. headquarters are urging FDIC regional offices to send letters to multiple banks requesting that they refrain from expanding relationships with crypto-related companies." 

The question is why would the FDIC not want banks to engage with crypto firms? 

"It's a thorny nexus of issues", Andrew Smith, the government and regulatory affairs director for America at GBBC Digital Finance tells AltFi. 

"Post Terra Luna and the Voyager confusion, I think the FDIC is being extra cautious. I think it's a risky situation and not a lot of folks want to make the decision and be the ones to own that risk", Smith adds. 

As the FDIC seems steadfast in not insuring crypto firms or banks, the Federal Reserve has suggested it is ready to empower traditional banks to carry out crypto-native financial services. 

On Wednesday, Federal Reserve Governor Bowman gave a speech saying that there are growing discussions about "bank's interest" in offering services "involving crypto-assets". 

Bowman adds that the Federal Reserve staff is working to articulate supervisory expectations for banks on crypto-activities including custody of crypto-assets, issuance of stablecoins by banking organizations,  the purchases and sales of crypto-assets  and loans collateralised by crypto assets. 

If the FDIC does not wish to ensure crypto firms and the Fed is looking to grant traditional banks access to crypto custody and stablecoin issuance, why have any crypto-native stablecoin issuers or crypto banks at all?

Order to Chaos

If anything, Federal Reserve's announcement is intended to bring a little order to the current regulatory chaos. However, there is quite a bit of cleaning up to do. 

For instance, the Securities and Exchange Commission (SEC), views cryptos as security. However, the Commodity Futures Trading Commission (CFTC) thinks of them as commodities. To top that off the FDIC does not wish to insure crypto firms. 

By offering a path for crypto firms to access master accounts, the Federal Reserve may be stalling for time by sitting on the fence.  

The guidelines are not a 'no' nor are they a 'yes', they simply acknowledge that it would technically be possible to crypto firms to get on the Federal Reserve System. 

At present, legislative proposals in Washington are also hoping to restore some order. 

The Lummis-Gillibrand Digital Asset Bill would look to overhaul the division of authority between the SEC and CFTC when cryptocurrencies are concerned. 

Interestingly, the Digital Asset Bill would also seek to help crypto firms access master accounts upon receiving a bank charter from the Office of the Comptroller of the Currency (OCC). 

It just so happens that Circle, the firm behind the USDC stablecoin launched an application in April to be registered as a charter crypto bank. 

This follows Custodia and Kraken Bank, both of whom have been in regulatory disputes to obtain master account access.