There are many players in the cryptocurrency space (Avanti Bank, for example, which aims to provide custody services for institutional investors in cryptocurrencies, as well as cryptocurrency exchange Kraken) who want to get access to the Federal Reserve payments systems that are currently the preserve of the “traditional” banks. Right now, they have to partner with the banks that have accounts at the Fed because they are not allowed Fed accounts of their own.
Naturally, as the Wall Street Journal observes, in article titled “Crypto Firms Want Fed Payment Systems Access”, the incumbent banks are pushing back.
To be honest I think that headline is a little misleading because Avanti and Kraken are not “crypto currency companies”, they are actually banks. Both have “special purpose” bank charters in Wyoming. But in my opinion, it is not only those organisations that should direct access to the payment systems but a great many fintechs and non-bank competitors.
Such access is not, by the way, a pipe dream.
You might remember that last year I wrote about giving non-banks access to the UK payment infrastructure.
There are plenty of non-bank players out there who want to have access to the infrastructure and the UK’s Emerging Payments Association recently presented a report to arguing that, under the appropriate licence conditions, non-banks should be allowed access to instant payments infrastructure through the use of a new kind of limited pre-funded settlement account at the Bank of England.
From Access | Consult Hyperion
Well, this is exactly what is going to happen.`
The widely-trailed move is expected to open up a competitive space which has long been the preserve of the UK’s biggest incumbents, providing non-bank PSPs with direct access to the UK’s sterling payment systems that settle in central bank money, including Faster Payments, Bacs, Chaps, Link, Visa, and, once live, the new digital cheque imaging system.
From Bank of England comes good on promise to provide non-banks with dir…
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In the UK, the Bank of England decided some years ago it would give direct access to non-banks who were able to fulfil reasonable conditions. The first of these was the foreign exchange fintech now known as Wise (a particular favourite of mine as I use their excellent service frequently) and others followed. A more recent example to study is Modulr (which recently secured new investment from FIS Ventures) and provides Payments-as-a-Service (PasS) api platform for software companies that deliver services to primary small and medium-sized businesses. These companies can deliver better services to their customers because of this direct connection.
The Bank is now pushing the boundaries even further. With all the fuss about their retail Central Bank Digital Currency (CBDC) taskforce, the Bank of England’s other big announcement didn’t get the same degree of attention, but as I pointed out here in Forbes earlier this year, it may have just as big an impact. To recap: the Bank announced a new kind of settlement account, known as an “omnibus” account, that allows for the wholesale use of central bank money in interesting new ways. The operator of a payment system can hold funds in the omnibus account to fund their participants’ balances with central bank money. This will allow them to offer innovative payment services, while having the security of central bank money settlement.
One of the first users of such as an account will be Fnality, formerly known as the the Utility Settlement Coin (USC). Fnality is now backed by 15 major financial institutions, ranging from Barclays and State Street to UBS and ING, and plans to go live once its application for an omnibus account is approved. will be able to go live once it’s approved. As Huw van Steenis, a former advisor to Mark Carney wrote, this may mean that Britain may have the world’s first synthetic digital currency system for wholesale payments — backed by a central bank — as early as next year. As he put it, this will have a profound impact on the role of banks in settlement so “this is what to watch, not the Bahamas’ sand dollar“.
So in principle, I couldn’t agree more with Caitlin Long, the Avanti CEO, who said granting direct access to the Fed’s payment systems to banks that cater to the digital asset sector should be welcomed because doing so would bring them “under the watchful eyes of regulators”.
George Selgin, who is a thorough scholar of such things and an expert on the evolution of payment services, wrote an excellent piece for The Hill making precisely this point, calling on the Fed to follow the example the Bank of England set in 2017 by providing “master accounts” to non-banks. In the UK, for example, Wise (formerly Transferwise) has a settlement account at the Bank of England and therefore access to the same payment rails that banks do.
I am strongly in favour of allowing crypto currency companies direct access to safe systems, as are serious economists, but with one obvious and important provides a: they must meet the same basic requirements and syntax, and indeed as banks, when it comes to customer due diligence. I am all in favour of competition in financial services and I think competition payment systems is a wholly good thing. What situation where expenses can reduce their cost base at the expense of the safety and security of society as a whole.
The Bank Policy Institute, which represents large banks, and the Independent Community Bankers of America sent in a letter to the Fed recently arguing that “such applicants will pose heightened risks regarding matters of anti-money-laundering, cybersecurity and consumer protection, as well as safety and soundness,”
In practice this means doing something about know your customer and anti-money laundering processes, but doing in a much more cost-effective way than we are accustomed to.
There are a couple of obvious options here. On the K YC side we need to introduce some sort of federated, previously enhancing know your customer. The obvious people to do this would be the banks themselves which is why I’m hoping that the new G a high N initiative may get some traction. Another way forward, tapping the costs of AML, would be to treat better AML as part of an overall digital transformation process rather than an end in itself. I noticed a recent paper from that explored whistle from and I found the discussions and other interest.
So yes let’s open up bed just as I want to see other players opened up in the name of competition. But let’s not sacrifice safety and security. That’s not an acceptable price for progress in the payment system.
Snippings 