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Crypto firms could access Federal Reserve system under Senate bill

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A wave of notorious and risky crypto companies will someday traditionally be under the little-known provisions of a new bill that is warning among financial experts about the potential consequences of instability. May be integrated into the banking system of.

This provision, which is part of the drastic proposal to regulate the crypto industry introduced by Senator Cynthia M. Lumis (R-Wyo.) And Kirsten Gillibrand (DN.Y.) In June, is part of this provision. Forces the Federal Reserve to grant so-called masters Accounts from central banks to specific crypto companies seeking them. The account provides the holder with access to the Fed’s payment system, allowing clients to settle transactions without involving another bank.

The two Wyoming-based crypto companies defended by Lumis are in a profitable position. Both Custodia Bank and Kraken Financial have been in trouble for the past two years in bidding to win a federal master account. However, financial regulators and experts say the impact of this measure will spread both inside and outside the industry.

The push by crypto companies to join the central plumbing of the banking system is a tremendous moment for the industry and its regulators. Since early May, the plunge in cryptocurrencies has wiped $ 700 billion from the digital asset market, with previously soaring start-ups, including those trying to bridge the gap between the crypto economy and traditional finance. I have been forced to count. One such company, Celsius Network, frozen $ 8 billion in deposits last month and stopped withdrawals because of “extreme market conditions.”

The crypto industry has won a big victory under the long-awaited Senate bill

Even before the latest meltdown, the Federal Reserve was hesitant to give crypto-focused banks a master account. In the case of Custdia, Federal Reserve Chair Jerome H. Powell cited concerns about unleashing the flow of other crypto companies that provide banking services, while lacking a federal insurance backstop.

“If we start allowing these, we’ll soon have hundreds,” Powell told Lumis when he pressured him on the issue at a parliamentary inquiry in January.

Under the Wyoming Act, these banks can reserve assets that are more volatile than federal-regulated banks (such as corporate debt and local bonds) and take action if they suddenly lose value. Former federal official Lee Liners, who currently runs Duke University, said the university’s Global Financial Markets Center could urge. “The concern is that entities with poor risk management and risk management may be integrated into the Fed’s payment system.”

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According to some experts, long-term consequences can be a new accumulation of systemic risk similar to that that precedes other financial collapses. “I’ve had so bad experience with banks without federal reserves in the past that I’m very concerned about the idea that uninsured banks of all kinds will have access to the Fed’s services and become more widespread,” Arthur said.・ Wilmers says. Professor of Honorary Law at George Washington University and an expert in financial regulation. “I’m worried that they might be important to the system. If they seem to fail, they may need to be rescued.”

Proponents argue that giving more companies access to the central bank’s payment infrastructure has the opposite effect, strengthening the crypto economy by giving federal supervisors a better view of their activities. increase. “Providing access to payment systems for more regulated financial institutions reduces risk by giving us a clearer picture of who is renting what,” said Lumis’ aide. “And if there is a systematic crisis, or if a bank goes bankrupt, it won’t have much of a spillover effect on the economy.”

The Fed is currently facing increasing pressure on action. On June 7, the same day that Lumis and Gilibrand filed the bill, Custdia sued the Federal Reserve and the Kansas City District Court in the Federal District Court of Wyoming. (The timing was a coincidence, said Lumis’ aide.)

Founded by Morgan Stanley veteran Caitlin Long, the company will set up a shop in Wyoming in 2020, using special rules adopted by the state the previous year to combine traditional banking with crypto trading. Attracted companies. Immediately after securing the state charter, I applied for a Fed master account. In the months that followed, “the result is an unexplained Kafkaesque process that continues to cause serious and irreparable damage to Custdia,” the company said in a proceeding.

The company has established itself as David to take over Goliath on Wall Street. “If federal regulators continue to curb innovators like Custdia, they’ll just catch up with the big banks and prey on the market,” said Nathan Miller, a spokesman for Custdia. “This gives consumers fewer choices and higher bank charges when American families are suffering from inflation and economic instability.”

The Federal Reserve Board and the Kansas City Federal Reserve declined to comment.

Kraken, as part of it, is primarily known as the cryptocurrency exchange and operates the second largest such trading platform in the United States. However, in 2020, an affiliate known as Kraken Bank will secure its first charter under Wyoming’s cryptocurrency carve-out, providing clients with a “seamless banking gateway” between digital assets and traditional currencies. I promised to do it.

Shortly thereafter, when Kraken Bank applied for a Fed master account, the united front of the bank’s lobbying group was pushed back. In a letter to the federal government, the coalition warned that Kraken’s business model represents a “new risk” and is hosting leveraged trading of volatile digital assets, resulting in a lack of federal oversight. I pointed out that I am doing it. Privately held Kraken said it plans to add 500 employees this month amid a severe recession in the crypto industry that some of its rivals have urged to reduce staff. The company declined to comment.

The Federal Reserve Board is developing criteria for granting master accounts. This process has been criticized by Republicans in Congress for its turbidity.

Crypto meltdown refocuses regulatory attention on the industry

The issue became a central stage earlier this year in a partisan battle over the nomination of Sara Bloom Ruskin, who will act as the Fed’s premier financial regulator. Raskin was a board member of Reserve Trust, a Colorado payments company, when he secured a master account in 2018 after being rejected a year ago. Senate Banking Commission Lumis and other Republicans have put pressure on Ruskin as to whether Ruskin used her influence to help the company as a former Fed official. Ruskin denied her injustice.

But the episode helped sink her nomination. As a result, the Kansas City Federal Reserve Bank of Kansas City has revoked the Reserve Trust master account. Senator Patrick J. Adams (R-Pa.), A top Republican member of the Senate Banking Commission, sent a letter to the bank in June asking for details of the decision. The Kansas City Federal Reserve Bank of Kansas City rejected his request because of the confidentiality of private citizens and the need to protect the banks’ own processes.

Republicans are pushing for bigger points. As financial technology start-ups tend to compete with traditional banks, the Fed needs to explain the criteria for restricting access to payment rails. Lumis told Powell at a hearing in June that the process remained a “black hole” and her frustration with it was “at the boiling point.”

The Federal Reserve is considering adopting a system that provides greater scrutiny for companies that are not insured by the federal government or are not regulated by the federal government. Dennis Kelleher, president of non-profit Better Markets, which advocates stricter financial regulations, said details are important, but this approach is “probably the worst in the world,” telling crypto companies. Allow access to the federal payment infrastructure “without imposing restrictions” at banks. As a result, it seems to protect taxpayers and the financial system, but the reality is not. “


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