Update: August 15th - 28th, 2022
Crypto financial institutions will now have “a transparent and consistent set of factors” when applying for access to the Fed’s payment system, including the master account...
Welcome back,
The past two weeks have not been the most exciting in the crypto regulatory space. Still, I think the following few updates are interesting, and I hope you agree.
Enjoy and see you soon.
-Katja
August 15th - 28th, 2022
Crypto financial institutions will now have “a transparent and consistent set of factors” when applying for access to the Fed’s payment system, including the master account.
A master account is a bank account at the Federal Reserve, which allows institutions to cut out the middlemen (regular banks) from the payment system. Currently, only select entities (like insured banks and select government agencies) have such accounts.
State chartered crypto banking entities and other crypto financial institutions have sought such accounts for various reasons, including the following,
Lower costs, higher competition, more innovation (including expanding product offerings)
Regular settlement (if issuers are closely connected through the Fed network, that means their liabilities are going to be cleared and settled regularly)
Discipline (having a common exchange network that most money passes through is a way to make sure that abuses don't go too far if they take place)
[For more on master accounts, I recommend listening to this episode of the Macro Musings podcast called “George Selgin on the Future of CBDC, Fed Accounts, and Stablecoins”.]
Before these new guidelines, the government showed hesitancy around crypto financial institutions applying for such accounts. For example, in June 2022, Custodia Bank, a Wyoming Special Purpose Depository Institution chartered in October 2020, sued the Federal Reserve for delaying its master account application for over 19 months.
Now, the Federal Reserve has finally provided clarity for the crypto industry by outlining its two primary considerations: the legal basis for the application and the risks involved in the applicant using Fed’s financial services. As stated in the report, these factors will reinforce the following goals for the larger payment system,
“The Original Proposal reflected the Board’s policy goals of (1) ensuring the safety and soundness of the banking system, (2) effectively implementing monetary policy, (3) promoting financial stability, (4) protecting consumers, and (5) promoting a safe, efficient, inclusive, and innovative payment system.”
Overall, this is great news for the industry. The increased transparency will allow crypto banks and other financial institutions to understand expectations, prepare their applications accordingly, and create a more open dialogue with the government.
[For more information on these guidelines, see the two recent press releases from the Fed: August 15 and August 16.]
In other US news,
The Federal Deposit Insurance Corporation (FDIC) issued letters to FTX US and four other crypto companies demanding they fix "false and misleading statements" about the insurance coverage for some of their products. [In related news, Senator Pat Toomey’s (R-PA) office issued a letter to the FDIC saying the agency "may be improperly taking action to deter banks from doing business with lawful cryptocurrency-related companies."]
The Federal Reserve Governor Michelle Bowman indicated in a speech that the US will likely favor the Fed’s upcoming FedNow service over a potential US CBDC. [This news comes at the same time as China moves into its next phase for CBDC testing by expanding the e-CNY payment for public transport.]
The Fed also issued a letter urging banks supervised by the Federal Reserve to report their intent to engage with crypto-asset-related activities before actually engaging.
The US Commodity Futures Trading Commission (CFTC) Commissioner Kristin Johnson emphasized the need for investor outreach and education on digital assets, especially since they’re gaining traction among historically underserved groups.
More news …
The European Union will create a new regulator, the “Anti-Money Laundering Authority,” that will have direct oversight over crypto businesses. In addition to this, the European Central Bank announced it will start working toward uniting and smoothing the current, fragmented licensing requirements for crypto in Europe.
Australia announced it will finally begin its venture into crypto regulation by conducting a “token mapping” exercise to understand how best to regulate the space.
The Canadian Securities Administrators (CSA) announced that crypto trading platforms will need to preregister with the agency to obtain “restricted dealer” status before receiving full registration, allowing these companies to continue functioning while waiting for their formal approval.
The Prudential Authority of the Reserve Bank of South Africa put out guidance to not cut off all ties to crypto stating that dropping crypto entirely could threaten general financial integrity.
Japan's Financial Services Agency is considering removing some of its current crypto taxing provisions to prevent the capital flight of crypto startups. On the topic of tax laws, South Korea may levy a 50% “gift tax” on crypto airdrops. [In other South Korean news, the Korea Financial Intelligence Unit (FIU) is cracking down on foreign-based cryptocurrency exchanges that have not registered appropriately within the country.]