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The decision by a US regional reserve bank to hand crypto exchange operator Kraken a master account has left American lenders seething.
Within hours of Payward Financial, doing business as Kraken Financial, receiving a master account, community banks and large-bank lobbying groups warned it could weaken the Fed's payments infrastructure.
Their core complaint: the Kansas City Fed approved a crypto exchange's access to core US payment rails before the Federal Reserve Board had finished writing the rules for so-called "payment accounts."
Critics say Fed jumped the gun
The backlash over Kraken's account lands in the middle of a much larger fight unfolding in Washington over who should be allowed inside the Federal Reserve’s payment system.
The Fed Board opened a public comment process in late December on the question of limited-purpose account access, receiving dozens of submissions from digital asset firms and traditional financial institutions. The Kansas City Fed’s approval landed before that process concluded.
"It front-runs the Board’s public comment process and violates the Board’s own policy on seeking public comment when it intends to make significant changes to the payments system," Paige Paridon, co-head of regulatory affairs at the Bank Policy Institute, said in a statement on the institute's website.
The move "calls into question whether the Board can ensure that the skinny account standards are applied consistently across Reserve Banks," she added.
What the Kraken account allows
The approval allows the company to access certain Federal Reserve payment services, such as the Fedwire funds transfer system. Master accounts give institutions direct access to the Federal Reserve’s payment rails and settlement infrastructure, privileges historically reserved for federally insured banks.
Kraken, founded in 2011, was categorized as a Tier 3 entity, meaning it is not federally insured and is subject to heightened scrutiny. This type of account is often referred to as a "skinny" account since it allows for payment processing but typically does not include access to the Fed’s interest on reserves balances.
"As we know, the payments landscape is actively evolving," Kansas City Fed President Jeff Schmid said in a statement. "Throughout this transformation, the integrity and stability of the US payments system remain our priority."
Kraken first applied for a master account in 2020 and said it will begin with a phased rollout, initially focused on facilitating institutional client activity.
Rebeca Rainey, president and CEO of the Independent Community Bankers of America (ICBA), warned of "significant risks to expanding direct Fed account access to institutions that operate outside the traditional banking regulatory framework."
Planned IPO
The master account also comes ahead of Kraken's planned public listing. The company disclosed in November that it had submitted a draft registration with the US Securities and Exchange Commission for an initial public offering of its common stock. Meanwhile, the crypto-native company has been pursuing acquisitions, including its $1.5bn purchase of US futures platform NinjaTrader last year.