Kraken Fed Approval Is SPDI Bank Model’s Biggest Test Yet

The question of who is allowed to connect directly to the core settlement systems that move money across the United States has historically been a straightforward one, and it came with just one answer. Regulated banks.

But the March 4 news that Federal Reserve Bank of Kansas City granted a master payment account to Kraken Financial, the banking arm of the cryptocurrency exchange Kraken, has turned this traditional thinking on its head.

For financial services, the most important implication may not be the specific approval, but the precedent of direct connectivity between crypto firms and the U.S. payment system.

As PYMNTS CEO Karen Webster  asked at the outset of the latest “From the Block” podcast with Citi Global Head of Digital Assets for Treasury and Trade Solutions Ryan Rugg, “Is this the moment that crypto becomes core financial infrastructure, or is this a signal about where crypto and banking really intersect for the future?”

The answer, according to Rugg, is both more significant and more complicated than headlines suggest.

“Kraken is the first exchange to get access to the U.S. payment system,” she said. “This is changing how firms are going to move money.”

Crypto Gets Direct Access to Fed Payment Rails

For years, the crypto industry has pushed for legitimacy inside the core architecture of the financial system. Now it may have its clearest opening yet.

While the Fed announcement landed as breaking news, the groundwork has been unfolding for years. Kraken Financial operates under Wyoming’s Special Purpose Depository Institution (SPDI) charter, a regulatory framework created in 2020 specifically to accommodate digital asset businesses.

SPDIs can custody digital assets and provide banking services, but they operate under constraints that distinguish them from traditional banks. Most notably, they cannot lend deposits and must maintain a full reserve requirement.

Rugg herself was involved early in the process. “When I was at IBM back in 2020, we helped the state of Wyoming write the SPDI.

“SPDIs must hold 100% against their deposits,” she explained. “They operate under banking regulation, but not with traditional lending.”

This model eliminates lending risk and reduces the possibility of bank runs, but it also can limit the range of services these institutions can offer. Kraken Financial’s master account therefore represents a unique hybrid: a digital asset bank connected directly to the U.S. payment system but operating under a distinct regulatory framework.

In practical terms, the crypto platform’s direct access to Fed rails could enable faster settlement between digital asset markets and traditional financial institutions. And if the SPDI model proves viable more broadly, it could eventually support a network of specialized payments banks operating alongside traditional financial institutions.

Future of Crypto-TradFi Payments

The next logical question that comes out of the Fed’s Kraken Financial approval concerns how deeply crypto infrastructure could ultimately merge with traditional payment networks. Kraken Financial itself, as a result of the Federal Reserve’s decision, is already beginning to function as a financial infrastructure node rather than a peripheral FinTech.

“It’s a tighter integration between the digital asset infrastructure and the TradFi rails than we have seen up until this point,” Rugg said.

After all, challenger institutions, whether FinTech companies, payment platforms, or crypto firms, have typically interacted with Federal Reserve payment rails, including systems such as Fedwire, indirectly through partner banks.

Direct access may eliminate that dependency. But at the same time, the Fed’s Kraken approval stops short of a full embrace.

Kraken Financial’s account is categorized as a Tier 3 institution, the Fed’s highest-risk classification, and the approval appears to come with significant limitations outside of its payment rail access. Unlike most banks, Kraken Financial does not offer FDIC deposit insurance. Nor does it appear to have access to the Federal Reserve’s emergency lending facilities.

“Those are two big safety nets that traditional financial institutions have,” Webster noted. “Those don’t exist with Kraken’s new bank.”

Disintermediation of Settlement

From an operational perspective, the most immediate impact of direct Fed access for any digital asset provider is the potential compression of settlement chains.

Today, a typical fiat transaction involving a crypto exchange involves several intermediaries: an exchange routes funds through a partner bank, which accesses Federal Reserve systems before transferring the payment to another bank representing the counterparty.

Each step, however, introduces latency, complexity, and counterparty exposure. Direct connectivity could shorten that chain.

“Removing reliance on intermediaries can help with improving on speed and fiat settlement,” Rugg said, stressing that regulators and industry participants will need clarity on how the new account works, how it will be supervised, and how operations will function.

For payments professionals, this type of settlement-layer compression reflects a broader trend across the financial industry. Institutions are seeking to reduce the number of intermediaries involved in transaction processing in order to improve speed, reduce costs, and manage liquidity more efficiently.

Digital asset firms gaining direct access to payment rails represent a potential acceleration of that trajectory.

“The big thing is same risk, same activity, same regulation,” Rugg explained.

New Regulatory Category

And the Fed’s approval appears to be deliberately structured as a kind of regulatory sandbox within the existing payment system.

“It appears to be structured in a limited type of account, meaning that they have access to the rails such as Fedwire, but maybe not the traditional privileges like earning interest on reserves or accessing emergency lending,” Rugg explained.

The tightly designed approval is also a temporary one.

“This approval was for only one year,” Rugg said, noting that the limited time frame allows regulators to evaluate the institution’s operations before determining whether broader access should be considered.

“If this works, it showcases that the Fed can innovate with safety through tailored risk-based access,” she added.

And while limited scope of the approval, combined with the absence of lending authority under the SPDI model, constrains Kraken’s ability to compete with full-service banks, Rugg suggested that many financial institutions may see collaboration opportunities rather than disruption.

“We’re working with several of these different FinTechs and exchanges,” she said. “We view it as a massive opportunity to partner and scale Citi Token Services.”

In that sense, the Kraken Financial approval may represent not the final step in crypto’s financial integration but rather the beginning of a long and closely watched experiment in how the architecture of money itself evolves.