Maxine Waters, a senior Democratic member of the US House of Representatives, sent an official letter to Kansas City Federal Reserve President Jeff Schmid, requesting a detailed explanation about the Federal Reserve master account provided for Kraken’s banking subsidiary. In his letter, Waters asked both the reasons for the permit process and what services this process covered.
Demand for transparency from parliament members
Waters said he expected a response from Schmid by April 10. In particular, he requested comprehensive information on what services Kraken has access to from the Federal Reserve, what restrictions there are on these services, and how the anti-money laundering and consumer protection measures implemented are evaluated.
In the announcement made by the Kansas City Fed on the subject, no details were shared about the services that Kraken can access; It was stated that this situation was due to the commercial confidentiality demands of the applicant institutions. However, Waters emphasized the importance of the transaction and emphasized the need for more transparency for such a sensitive decision.
It is reported that Kraken’s application has the status of a “skinny”, that is, a limited-purpose master account. The account in question gives Kraken Financial certain access to reserve holdings and clearing transactions on Fedwire and possibly ACH systems. However, it does not include access to the Fed’s liquidity facility or support.
Kraken’s status and market reactions
Kraken Financial operates under the “Special Purpose Depository Institution” (SPDI) license in Wyoming as a subsidiary of the US-based cryptocurrency exchange Kraken. The company holds its assets entirely in reserve, does not offer lending services and does not provide insurance for deposits. The balance of each customer of the company is covered by reserves at a one-to-one ratio.
This step of the Federal Reserve created serious controversy in traditional banking circles. Paige Pidano Paridon, policy advisor at the Bank Policy Institute, argued that although it was stated that the application was evaluated publicly, the process was not conducted transparently and there was no clarity as to what risk control mechanisms were implemented.
Regarding the issue, Fed’s Deputy Chairman of Audit Michelle Bowman stated that they want to learn new things in the process and that inconsistencies detected during monitoring can be intervened.
On the other hand, the master account application of Custodia Bank, another company based in Wyoming and with a similar legal structure, was rejected in 2023. Unlike the rejection process experienced by Custodia, the approval of Kraken’s application has been criticized because the criteria applied to these applications are not disclosed to the public.
The response from the President of the Kansas City Fed will set an important precedent on whether similar master account applications from other crypto institutions will be accepted in the future. If detailed information is shared, the process can become standardized; Otherwise, the pressure from Congress may increase and the issue may be addressed publicly.
The one-year pilot approval given to Kraken and the simultaneous progress of the company’s IPO plans on the stock exchange further increase the long-term effects of this development.
