Inside the Fed’s Plan for “Skinny” Master Accounts

Federal Reserve Governor Christopher Waller has proposed a new path to registration with the central bank. He has asked the Fed staff to explore a lighter version of “master accounts” that gives financial firms access to US payment rails.

The “skinny” master accounts would be issued on a streamlined timeline to institutions that haven’t yet secured full-fledged ones. This move can unlock privileges for crypto companies that they have long been seeking.

An associate of President Donald Trump, Waller is on the administration’s shortlist to replace Fed Chair Jerome Powell when his term ends next year. He has been calling for lower rates and recently voted with the majority of governors in favor of a quarter-point move.

Waller has emphasized the importance of keeping politics out of central bank decisions. In a speech earlier this year, Waller hailed the benefits of an independent central bank and then, later, in an interview, argued for the selection of a chair who is reliable as an inflation fighter. 

Just last week, the Fed governor supported rate cuts this month at the two-day Federal Open Market Committee (FOMC) meeting, which will be held on October 28-29.

Amidst growing concerns about labor market weakness, a rate cut is “the right thing to do,” he said. With the labor market showing weakness, the governor said 25 basis points is a good start to get a “better idea” about things.

Rate cuts make cash less attractive as it becomes a low-yield asset, pushing investors towards riskier assets like cryptocurrencies.

Besides indirectly supporting crypto through rate cuts, Waller has also spoken directly in favour of the industry. A couple of months ago, while speaking at the Wyoming Blockchain Symposium in Teton Village, Wyoming, Waller said, “there is nothing scary” about the DeFi world and that this is “simply new technology to transfer objects and record transactions.”

He added:

“There is nothing to be afraid of when thinking about using smart contracts, tokenization, or distributed ledgers in everyday transactions.” 

He described stablecoins as an advancement in payments that have evolved beyond their original purpose. Not only do stablecoins have “the potential to maintain and extend the role of the dollar internationally,” but they also improve retail and cross-border payments,” he said.

Noting the passage of the GENIUS Act, which has created a federal framework for stablecoin issuers, Waller said that this could help dollar-pegged tokens “reach their full potential” in the US. He added:

“As the stablecoin market matured, firms found that the properties of stablecoins using distributed ledger technology—including 24/7 availability, fast transferability, and their freely circulating nature—could be attractive for other use cases as well.” 

Now, he’s further promising that the Fed will continue to embrace innovations in the crypto sector and is actively exploring giving financial firms access to US payment rails.

The Fed’s Shift Toward Innovation

On Tuesday, the Federal Reserve Board held its first Payments Innovation Conference in Washington, D.C. 

The objective of this conference, Waller said, has been to see how new technologies from the world of DeFi and crypto are entering the mainstream payments ecosystem and have a vibrant discussion about payments with both the new entrants and the traditional payment incumbents. But that’s not all.

“I wanted to send a message that this is a new era for the Federal Reserve in payments—the defi industry is not viewed with suspicion or scorn.”

– Waller said while speaking at the conference.

The Fed governor said the central bank plans to be an active part of this technology-driven payments revolution.

These advances that are transforming the payment system include stablecoins and tokenized assets. They, along with the AI, are converging with the TradFi ecosystem, which Waller noted includes institutions and infrastructure that the US economy has long depended on to operate a safe and efficient payment system. 

When it comes to payments innovation, the private sector is the most “motivated and best positioned to allocate resources and take risks to explore new technologies,” said Waller. From banks, asset managers, retail payments firms, and technology companies to crypto-native fintechs, these entities are actively engaged in payment innovation.

What this shows is that “distributed ledgers and crypto-assets are no longer on the fringes but increasingly are woven into the fabric of the payment and financial systems,” the governor added.

The private sector is just one part of this equation; the other is the public sector, where the Fed builds platforms and provides services to enable the private sector to rapidly expand its offerings more readily. But that “should be done rarely and in limited circumstances,” said Waller.

What public institutions should be doing is acknowledging and embracing innovations from the private sector.

The role the Fed plays to support the private sector includes “serving as a convener to solve coordination problems and operating core payment and settlement infrastructure. We are also looking ahead, conducting hands-on research on tokenization, smart contracts, and the intersection of AI and payments for use in our own payment systems,” Waller said.

But this is just the beginning; the Fed governor believes they should be doing more to support those who are actively transforming the payment system. And to that end, he has asked the Fed staff to look into a “payment account.”

Currently, the Fed only provides access to these accounts and financial services to specific entities. In contrast, the payment account Waller is recommending would be available to all eligible institutions.

With this, the idea is to provide general Fed payment services to legally eligible institutions that conduct payment services mainly through another bank with a full-fledged master account, he said.

Many firms engaged in payment activities may not want or need all the features offered by a master account to innovate and provide services to their customers, the Fed governor noted at the conference. So, the payment account will tailor the services of new accounts to the needs of these firms.

Notably, “these lower-risk payment accounts would have a streamlined timeline for review,” said Waller. “Payments innovation moves fast, and the Federal Reserve needs to keep up.”

What Is a Fed Master Account?

The Federal Reserve’s master accounts have been in existence ever since the Fed was created more than a century ago and began maintaining deposit accounts for member banks.

A Fed master account is simply a bank’s deposit account at the Reserve Bank, which gives that bank direct access to the central bank’s payment systems, like Fedwire and FedNow. The account is possessed by all federally chartered banks.

The services offered to a master account are similar to what customers get from their banks.

So, this account is used by a financial institution to hold funds and make electronic transfers of money between banks, as the accounts are interconnected to facilitate payments between different institutions. Access to payment systems also allows the holder to clear and settle transactions electronically. 

Moreover, those with master accounts have access to a range of services from the central bank, such as cash distribution and coin collection, as well as check collection. The holder can further use optional subaccounts for different purposes, all managed under a single master account. 

But who can have a master account and gain access to all these features? Historically, a master account has been mainly for banks and credit unions. Receiving a master account has also been a routine process for institutions with a bank charter. 

Recently, the Fed opened up its master accounts to non-bank financial institutions, but for that, they have to first meet the necessary access guidelines. 

All this is finally changing, as Waller announced in this speech. The Fed is now exploring the creation of payment-only master accounts for firms innovating in payments, such as crypto companies and other emerging financial technologies, that may not need full access to all the services that come with master accounts.
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Introducing the Fed’s ‘Skinny’ Master Accounts

What the Fed governor is proposing is a “skinny” master account. This account would provide its holders access to Federal Reserve payment rails while controlling for risks to the payment system and the central bank.

What this entails is that Reserve Banks would not be paying interest on balances in a payment account, Waller noted. Moreover, there may be balance caps on “skinny” master accounts in order to control both the account size and its impact on the Fed’s balance sheet.

Per the prototype idea of a payment account, they won’t have daylight overdraft privileges, which means if the balance goes to zero, payments will be rejected. These account holders wouldn’t be eligible for discount window borrowing either. Also, these newly proposed accounts won’t have access to all Fed payment services for which the Reserve Banks cannot control the risk of daylight overdrafts. 

While just an initial proposal at this point, Waller said, “the payments landscape, as well as the types of providers, has evolved dramatically in recent years, and, accordingly, a new payments account could better reflect this new reality.”

The governor also said that while the central bank looks into this idea, it will engage interested stakeholders on the benefits and drawbacks of this approach. “You will be hearing more about this shortly,” he said.

This can be a big deal for crypto-focused institutions, which have been trying to secure these services but haven’t been able to so far. With this proposal, they may finally gain the ability to function as national banks.

The Fed’s Access Requests database shows that several prominent digital asset institutions, including Kraken, Anchorage Digital, Custodia Bank (formerly Avanti Bank), Paxos, and WisdomTree Digital Trust, have formally requested access to the Reserve Bank’s financial services. 

To increase transparency in this process, the central bank launched a public database for master account access in 2023. The Master Account and Services Database is a searchable platform detailing which financial institutions already have access to Fed financial services or have requested access. Those in the Access Requests database are either seeking their very own master account or want to access the bank’s financial services by settling transactions in another depository institution’s master account.

Among the earliest applicants was Custodia Bank, a Wyoming-chartered special-purpose depository institution (“SPDI”), which applied for a master account back in late 2020 but was denied in early 2023 by the Federal Reserve Board of Kansas City (FRBKC). Custodia subsequently sued the Board, calling its actions arbitrary, capricious, and not in accordance with the law, and asked the court to compel the Board to grant access.

The US District Court, however, dismissed Custodia’s complaint against the Board and ruled in favor of the FRBKC. The court found that FRBKC had discretion to deny the request and rejected arguments that banks and institutions with novel charters have a statutory right to get a master account. 

These challenges faced by new entrants in accessing the Fed’s payment system can be expected to fade if Waller’s proposal for “skinny” master accounts moves forward.

A Breakthrough for Crypto Banking

While certain privileges will not be offered to crypto companies, their ability to function as federal banks would be a big development for crypto firms. This would also have significant implications for stablecoin issuers, crypto exchanges, and the broader digital asset ecosystem.

Banking has been a major problem for the crypto sector for a long time. Many crypto-native firms, including exchanges, hedge funds, and asset managers, have had trouble getting banking relationships. For instance, the Alternative Investment Management Association (AIMA) found that 75% of crypto hedge funds reported issues accessing or growing banking services, versus none of the traditional alternative investment managers.

This began to change under the current administration, with the introduction of several policy changes, including the Federal Deposit Insurance Corporation (FDIC) announcing that it would no longer require banks to have prior approval to engage in legally permitted crypto activities.

A growing number of firms in the crypto space are also seeking banking charters. This includes Coinbase (COIN -0.82%), Circle, Paxos, and BitGo, which are reported to be considering applying for bank charters or licenses.

For the crypto space, better banking access translates to easier fiat on- and off-ramps and better integration with TradFi services. The better integration of crypto and banking also means the evolution of tokenized assets and payment systems.

So, if “skinny” master accounts become a reality, it would transform the US banking landscape. The US-based institutions innovating in the payment space won’t have to depend on other banks that hold these accounts; instead, they will be able to gain direct access to the central bank’s services. 

This will eliminate the intermediary banks that have access to the Fed’s payment systems, thereby reducing costs, friction, and operational dependencies for crypto firms. Stablecoin issuers, in particular, may get to enjoy simplified liquidity management and settlement flows.

There would still be significant limitations as the “skinny” nature means firms won’t get all the privileges of a bank; no interest, no overdraft, no Fed lending support, and balance caps. On top of that, these accounts still will require eligibility, approval, and likely oversight. So crypto firms will still face scrutiny and control.

But despite these limitations, skinny master accounts are expected to give crypto firms a competitive advantage and even shift market dynamics.

Final Thoughts

The kick-off of the central bank’s first payments innovation conference, with the promise of supporting crypto and DeFi innovations and exploring a lighter version of the master accounts, marks a major milestone for the digital asset space.

The Fed’s exploration of “skinny” master accounts signals a shift in how America’s central bank engages with innovation. By recognizing that crypto and tokenized assets are now integral to the payments ecosystem, the central bank is taking a cautious yet meaningful step toward inclusivity.

While risks are still there, the Fed has opened the conversation and the rails to new entrants. For crypto firms and the broader digital economy, this could be the beginning of a new era where crypto companies gain legitimate access to the US financial system, bridging the gap between traditional banking and the decentralized future!

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