Cryptocurrency companies want Federal Reserve payment systems access, banks resist
Cryptocurrency companies want to tap into the Federal Reserve payment systems that traditional banks use to move money around quickly. The banks are pushing back.
The companies include Avanti Bank, which aims to provide custody services for institutional investors in cryptocurrencies, and Kraken, a cryptocurrency exchange platform. They say direct access to the Fed’s payment systems would allow them to more quickly and cheaply process orders from customers buying and selling digital assets. Currently they must partner with traditional banks that have accounts with the Fed.
Traditional banks say the newer financial firms are supervised relatively lightly and lack the internal controls needed to ensure against money laundering and other illicit activities—concerns that regulators have expressed about the crypto industry more broadly. And they say the firms are riskier because they aren’t insured by the Federal Deposit Insurance Corp.
“It is reasonable to expect that such applicants will pose heightened risks regarding matters of anti-money-laundering, cybersecurity and consumer protection, as well as safety and soundness,” the Bank Policy Institute, which represents large banks, and the Independent Community Bankers of America wrote in a letter to the Fed last month.
Avanti and Kraken, which both have “special purpose” bank charters in Wyoming, say they have all the same compliance, controls and supervisory requirements of traditional banks. The only U.S. bank regulator that has a supervisory exam manual for crypto is in Wyoming, they say.
If they have access to the Fed’s payment systems, it could encourage more firms to do the same, thereby increasing competition for banks.
“It has the potential to reduce banks’ traditional role as gatekeepers and toll collectors for payment flows that are likely to grow over time,” said Jonah Crane, a partner at Klaros Group, an advisory and investment firm.
The struggle over access to the Fed’s payment systems also reflects incumbent banks’ concerns about the potential for competition from larger tech companies, such as Facebook Inc. and Google parent Alphabet Inc., which don’t face the same level of federal bank regulation.
“They have some reason to be paranoid,” said Eugene Ludwig, a former comptroller of the currency, who was responsible for the regulation of large national banks.
For example, Diem Association, which is backed by Facebook and 25 other members, has said it is developing a blockchain-based payment network that will be faster and cheaper than existing systems while protecting consumers and providing safeguards against financial crime. Diem is partnering with a Fed-regulated bank on the project. But if other tech companies got direct access to the Fed’s payment systems, they may not need to take the additional step of partnering with established banks, according to banking lawyers and former regulators.
Regulators are also concerned that some types of crypto activities could pose risks to financial stability if they grow big enough. For example, some officials worry that stablecoins, a form of digital currency pegged to the value of the dollar and other traditional currencies, could be susceptible to the kinds of runs that affect banks and mutual funds in a crisis.