Fed Eyes Fintech and Crypto: A New Path to Payment Access

The Federal Reserve is considering a novel approach to integrate fintech and crypto firms into its payment systems. This move, aimed at fostering innovation, involves creating limited-access accounts, dubbed "skinny accounts. " These accounts would allow non-bank financial institutions to settle transactions directly through the Fed's infrastructure, a privilege currently reserved for traditional banks. The proposal, open for public feedback, suggests that these accounts would not earn interest or provide access to credit facilities. To mitigate risks, the Fed proposes an overnight balance cap of $500 million or 10% of the institution's total assets, whichever is lower. Moreover, these accounts would be restricted to the account holder's own transactions, preventing them from acting as correspondent banks or settling payments for third parties.The Fed's Governor Christopher J. Waller emphasized that this initiative is a step towards adapting to the evolving payment landscape. However, not all policymakers are on board. Governor Michael Barr, a Democratic appointee, expressed concerns about the lack of detailed protections against financial crimes, such as money laundering and terrorist financing. This proposal comes on the heels of the Fed's recent decision to withdraw a 2023 rule that imposed activity restrictions on state member banks. The Fed concluded that changes in the financial system and its own understanding rendered the rule ineffective. This shift indicates a broader trend of the Fed adapting to the rapid pace of financial innovation. The debate surrounding this proposal highlights the tension between fostering innovation and maintaining financial stability. As the Fed navigates this complex landscape, it must balance the need for flexibility with the imperative of safeguarding the financial system.