The banking arm of cryptocurrency exchange Kraken is one step closer to gaining full access to the global payments system.
By granting a routing number to Kraken Bank, the American Bankers Association (ABA) has put a second digital asset-focused institution on the road to a Federal Reserve Master Account and, ultimately, getting full access to U.S. and global payments rails.
Wyoming-based Kraken Bank joins Custodia Bank — formerly known as Avanti — which received a routing number in February.
Both Kraken Bank and Custodia bank have Wyoming special purpose depository institution, or SPDI, charters, which allow them to offer comprehensive deposit-taking, custody and fiduciary services for digital assets.
When it was granted its SPDI in September 2016, Kraken said the charter would let it offer services ranging “from paying bills and receiving salaries in cryptocurrency to incorporating digital assets into investment and trading portfolios.”
Thanks to its SPDI, Kraken Bank clients would be able to “bank seamlessly between digital assets and national currencies,” it said. The firm had not commented on the grant of a routing number as of press time.
If the two institutions do receive Master Accounts, it would strengthen Wyoming’s place as a financial hub for the cryptocurrency and digital assets industry — something Sen. Cynthia Lummis, R-Wyo., warned last year that the state was in danger of losing due to what her office blamed on the “slow pace of federal regulators and quasi-regulatory organizations like the American Bankers’ Association in developing rules to allow consumers to bank with the decentralized, digital currency.”
A Rocky Road
While a routing number does not guarantee the Fed’s approval, it is an important step — and one that could give digital asset firms more secure access to mainstream banking.
The cryptocurrency industry business is becoming more accepted in banking circles these days, but it still has painful memories of severe difficulties in this regard in the U.S., with banks abruptly cutting off services in 2017 and 2018, to the point that the retail customers sending cash to exchanges would lead to an account closure.
Beyond that, just because the ABA granted Kraken and Custodia the routing numbers does not mean the organization will support access to a Fed Master Account.
In a Twitter thread after Custodia received a routing number, Julie Hill, a professor at the University of Alabama School of Law specializing in financial institution regulation, said the ABA likely asked the Federal Reserve if the SPDI was a “depository institution” before granting it.
“However, the Federal Reserve believes that reserve banks have authority to refuse to open master accounts for some “depository institutions” that present excessive risk,” she wrote. So, she said, a Federal reserve bank “might still deny any master account application from a Wyoming Special Purpose Depository Institution (SPDI) because it deems the applicant’s business plan too risky.”
However, the Federal Reserve believes that Reserve Banks have authority to refuse to open master accounts for some “depository institutions” that present excessive risk. This is evident from its proposed payment systems access rules. https://t.co/kzoX2atZpK
— Julie A. Hill (@ProfJulieHill) February 10, 2022
A Number, Not Support
Indeed, the ABA opposed SPDI charters in a testimony before the House Financial Services Committee last year, calling them a recipe for regulatory arbitrage that would create “a two-tiered system where these entities’ customers and counterparties will be subject to increased risk and weaker consumer protections.”
The ABA said it opposed this type of charter at an April 15 hearing titled “Banking Innovation or Regulatory Evasion? Exploring Trends in Financial Institution Charters.”
The new charters, the ABA said, “are designed to pair bank-like benefits such as federal preemption and access to critical shared infrastructure like the Federal Reserve payment system, with less regulation and oversight of consumer and systemic risks.”
On Feb. 16, the Fed sought public comments on a proposal to change account access guidelines for Federal Reserve Banks to a three-tiered system.
Tier 1 would be federally insured institutions that would be subject to a “less intensive and more streamlined review.”
Tier 2 would be federally supervised but not federally insured institutions.
Tier 3 would consist of “eligible institutions that are not federally insured and not subject to prudential supervision by a federal banking agency at the institution or holding company level.”
Saying that these institutions may subject to “possibly weaker” supervision and regulations, the Fed proposal said they will “receive the strictest level of review.”
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