The Federal Reserve has proposed creating a new category of payment account that some financial institutions could use to clear and settle transactions.
The long-awaited proposal is seen as a next crucial step for fintechs and non-traditional financial institutions seeking direct access to payment systems, which are historically used by banks.
The plan stems from earlier work the Fed to study simplified account models, as it looks for ways to give more firms access to its payment network while keeping the financial system safe and stable.
Accordingly, the agency said in a statement Wednesday, the proposed account, which is subject to public input, would be “tailored to support innovation” while also “mitigating material risks to the Reserve Banks and payment system,”
The Fed had previously floated the idea of a new type of account as crypto and fintech firms pushed for direct access to the agency’s payment systems. Since then, the Kansas City Fed awarded Kraken a limited purpose account, making it the first digital asset bank to gain direct access to the payment infrastructure.
As per the initial report, the proposed account could be used for clearing and settling their payments.
The Fed said account holders would not have access to intraday credit or the discount window, would not earn interest on balances held at a reserve rank, and would only have access to payment services with automated controls to prevent overdrafts.
Fed Governor Michael Barr opposed the plans, saying “the protections remain inadequate.”
“I cannot support this set of proposals because it does not provide sufficiently specific and robust safeguards to protect against the accounts being used for money laundering and terrorist financing by institutions we do not supervise,” Barr said.
Donald Trump signed an executive order on Tuesday calling on regulators and the Federal Reserve to review rules that may be stifling financial innovation, including whether the central bank could expand fintech access to its payment rails, the systems that move money between banks.
The order asks the Fed to join other regulators in reviewing policies that could be updated to support fintech growth. It also calls on the Fed to examine its approach to granting access to payment accounts and services, and to consider options for expanding such access to fintechs and other non-bank firms.
(With inputs from Reuters and Bloomberg)