More crypto firms likely to get Fed master accounts and banks lack power to block approvals, TD Cowen says

More crypto firms are likely to gain access to Federal Reserve master accounts this year following the approval granted to Kraken, despite expected pushback from banks, according to investment bank TD Cowen.

"We see this as the first of many Federal Reserve approvals for crypto entities to obtain master accounts," Jaret Seiberg, managing director at TD Cowen’s Washington Research Group, said in a Thursday note. "As we have written since the election, crypto entity access to master accounts was inevitable under President Trump given his support for the crypto sector. We expect additional announcements in the coming months."

On Wednesday, Kraken’s banking unit, Kraken Financial, became the first crypto company to win access to the Federal Reserve’s core payment systems. The Federal Reserve Bank of Kansas City said it approved a "limited purpose" account for Payward Financial, doing business as Kraken Financial, for an initial term of one year that includes undisclosed restrictions and limitations tailored to Kraken Financial’s business model and risk profile.

Kraken qualified for the account because it operates as a Wyoming-chartered Special Purpose Depository Institution, placing it in what regulators describe as the "Tier 3" category. These entities are legally eligible for master accounts but face the "strictest" regulatory scrutiny because they lack a federal banking supervisor, Seiberg said.

He added that the Kansas City Fed’s decision suggests regulators have completed a full review of Kraken’s application, though details of the conditions attached to the approval remain limited. According to Seiberg, the Fed will limit Kraken’s access to certain services. He said the central bank is unlikely to grant Kraken access to credit facilities such as overdraft privileges or the discount window. Seiberg also expects Kraken will not earn interest on reserves held at the central bank.

"What does make this interesting is that the Kansas City Fed approved the limited master account access before the Federal Reserve Board approved so-called skinny master accounts, which are designed to be easier to approve because they limit access to Fed credit programs and do not pay interest on reserves," Seiberg said.

Banks will fight back

Banks are likely to continue opposing such approvals, according to Seiberg. The Bank Policy Institute, which represents major U.S. banks, already filed objections to granting master accounts to crypto-related institutions. The institute said it was "deeply concerned" that the Kansas City Fed approved an account request for a limited-purpose master account — which appears to be a "skinny" account — before the Federal Reserve Board finalized its policy framework for those accounts.

Seiberg said Kraken’s approval likely reflects the fact that the Kansas City Fed was able to complete a full review of its application under existing procedures. Other crypto firms whose applications are less advanced may have to wait for the Federal Reserve Board to finalize the streamlined review framework.

"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."

In 2023, the Federal Reserve Board denied the application by Custodia Bank to become a member of the Federal Reserve System, concluding that the firm's proposal was inconsistent with the required factors under the law.