TLDR
- TD Cowen expects more crypto firms to win Fed master accounts
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Kraken Financial received limited account from Kansas City Fed
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Banks may litigate but lack authority to block approvals
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Kraken likely denied Fed credit access and reserve interest
TD Cowen said more crypto firms are likely to obtain Federal Reserve master accounts this year. The projection follows the approval granted to Kraken’s banking unit.
On Wednesday, Kraken Financial became the first crypto company to gain access to core Federal Reserve payment systems. The Federal Reserve Bank of Kansas City approved a limited purpose account for Payward Financial, which operates as Kraken Financial.
The approval is valid for one year and includes undisclosed restrictions. Regulators tailored the limitations to Kraken’s business model and risk profile. Kraken qualified because it operates as a Wyoming-chartered Special Purpose Depository Institution. Regulators classify such institutions as Tier 3 entities, which face strict oversight.
Jaret Seiberg, managing director at TD Cowen’s Washington Research Group, said the decision suggests a full review was completed. He added that details about the attached conditions remain limited.
TD Cowen Sees More Approvals Ahead
Seiberg said the approval marks the beginning of broader access for crypto entities. He stated,
“We see this as the first of many Federal Reserve approvals for crypto entities to obtain master accounts.”
He added that crypto access to master accounts was expected under President Donald Trump due to his support for the sector. TD Cowen expects additional announcements in the coming months. The note also explained that Kraken’s access will likely remain restricted. Seiberg said the Federal Reserve is unlikely to grant access to credit facilities such as overdraft privileges or the discount window.
He also expects Kraken will not earn interest on reserves held at the central bank. The approval came before the Federal Reserve Board finalized its framework for streamlined “skinny” master accounts. According to Seiberg, the Kansas City Fed acted under existing procedures because Kraken’s application review was already advanced.
Banks Expected to Challenge Decisions
Banks are likely to continue opposing master account approvals for crypto firms. The Bank Policy Institute has already filed objections.
The institute said it was “deeply concerned” about the Kansas City Fed’s decision. It questioned why approval was granted before the Federal Reserve Board finalized its policy framework.
Seiberg said banks may pursue litigation and political action. However, he argued that banks lack the authority to block approvals once regulatory criteria are met.
“Banks will continue to fight to prevent crypto access to master accounts,” Seiberg said. “Though we expect litigation and political pushback, our view remains that crypto entities will have master accounts.”
He noted that other crypto firms with less advanced applications may need to wait. They could depend on the Federal Reserve Board’s final streamlined review process.
Regulatory Background and Prior Denials
In 2023, the Federal Reserve Board denied an application by Custodia Bank to become a member of the Federal Reserve System.
Regulators concluded that Custodia’s proposal did not meet required legal factors. That decision shaped expectations around crypto firms seeking direct access to Federal Reserve services.
Kraken’s approval signals a shift in regulatory treatment for certain crypto institutions. However, the scope remains limited and subject to review after one year.
TD Cowen maintains that further approvals are likely under the current policy environment. Banks are expected to respond, but the firm believes regulatory processes will continue moving forward.
