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Traditional banks have objected to the demand from crypto firms citing that these players do not have right internal controls to handle illicit activities like money laundering.
Well, crypto firms are now looking to get access to the Federal Reserve (Fed) payment systems. However, traditional banks have raised serious objections to this proposal, reports WSJ.
Wyoming-based crypto bank – Avanti Bank – and crypto exchange Kraken are the first ones to demand access. These two players have been working on offering custodial services to institutional layers participating in digital assets.
They also said that direct access to Fed’s payments system will allow them to quickly and cheaply process orders. Thus, it will make it absolutely convenient for the customers to buy and sell digital assets. Currently, crypto firms have to partner with traditional banks having accounts with the Fed.
However, traditional banks have objected saying that there’s little supervision around these crypto firms. Thus, they lack internal controls to take care of money laundering and other illicit activities.
These have also been one of the most pressing concerns from the regulators. Furthermore, traditional banks have argued that these crypto firms are riskier since they don’t have insurance through the Federal Deposit Insurance Corp. In a letter to the Fed last month, the Independent Community Bankers of America wrote:
“It is reasonable to expect that such applicants will pose heightened risks regarding matters of anti-money-laundering, cybersecurity and consumer protection, as well as safety and soundness”.
Cutting Down on Banks’ Importance
Interestingly, both Avanti and Kraken have special-purpose bank charters in Wyoming. Meaning, they have all the same compliance, controls, and supervisory requirements as traditional banks.
If both these players make their way through the Fed’s payments system, it will encourage more players in the space to do so. Thus, crypto firms will stand in direct competition to the banks which that latter don’t want. Jonah Crane, a companion at Klaros Group, an advisory and funding agency said:
“It has the potential to cut back banks’ conventional function as gatekeepers and toll collectors for payment flows that are more likely to develop over time”.
Last year, the Federal Reserve processed a massive $900 trillion in funds through its payment systems. Thus, an entry into the Fed’s payments system will give the crypto firms a sizeable recognition. Apart from crypto companies, traditional banks have also pushed back on similar demands from some bigger tech companies.
Big Tech companies like Facebook‘s Diem have been working to build financial infrastructure facilitating instant cross-border payments at negligible costs.
Last month, Avanti Bank CEO Caitlin Long proposed a direct entry for crypto firms into the Fed’s payments systems. This will help them get away from the scrutiny of the regulators. Long said:
“The absence of motion to open a direct path has pushed a lot of the U.S. greenback banking of the digital asset trade into the ‘shadow’ banking system, which suggests dangers can’t be readily monitored”.
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