Kraken Reveals Fed Account Bars Interest and Emergency Lending

Crypto exchange Kraken’s limited purpose account granted by the Kansas City Fed has some restrictions designed to mitigate risk, Reuters reported Friday (April 10).

Kraken can’t earn interest on reserve balances held at the Fed, can’t access emergency Fed lending, and can’t access the Fed’s FedNow® Service and ACH payments systems, according to the report, which cited a Kraken spokesperson.

These details were not previously disclosed, according to the report.

The company’s Fed master account does allow its Wyoming banking arm to access the Fedwire wholesale payments system and hold limited balances overnight, per the report.

“We look at this as a great testament to regulatory rigor and cooperation,” Jonathan Jachym, global head of policy at Kraken, told Reuters. “It promotes principles of both safety and soundness, and innovation.”

PYMNTS reported March 4 that the approval granting Kraken Financial a Federal Reserve master account followed years of “sustained regulatory engagement” and made Kraken Financial the first bank of its kind to be given access to the Fed’s payment system.

According to Friday’s report by Reuters, the Kansas City Fed’s decision to grant Kraken a “limited purpose account” last month led to banks raising concerns about risk, and Rep. Maxine Waters, the ranking member of the House Financial Services Committee, questioning the transparency of the decision.

Waters asked the Kansas City Fed in March to disclose more details about the decision by Friday. A Kansas City Fed spokesperson told Reuters that it is reviewing the letter.

Waters said in a March 26 press release about the letter: “The Kansas City Fed’s announcement does not disclose specific information about Kraken’s access to the range of Federal Reserve financial services ‘due to the confidentiality of business information provided by applicants.’ However, the announcement raises questions about the approval because neither statute nor the Federal Reserve Board’s Account Access Guidelines refer to a ‘limited purpose account’ type.”

When announcing the approval of a limited purpose account for Kraken in a March 4 press release, Kansas City Fed President Jeff Schmid said: “As we know, the payments landscape is actively evolving. Throughout this transformation, the integrity and stability of the U.S. payments system remain our priority.”

The Kraken spokesperson told Reuters, per the report, that the company’s bank reserves are fully backed, the company complies with all bank-grade anti-money laundering (AML) and know your customer (KYC) requirements, and the company has never been hacked.