On October 21, Federal Reserve Board Governor Waller delivered an important speech titled "Embracing New Technologies and New Participants in Payments" at the "Payments Innovation" conference hosted by the Federal Reserve.
There are two points worth noting in the speech. First, the Federal Reserve has actively participated in the Crypto revolution. Waller stated that we no longer view the DeFi industry with suspicion or disdain. Waller declared: The Federal Reserve will actively participate in this transformation.
Second, Waller announced that the Fed is proposing a new type of limited access master account (or what he called a "streamlined master account"), which would allow all legally qualified institutions to directly access the Fed's payment channels without relying on partner banks.
Under this regulation, these institutions would not be able to use all the services of the master account, such as borrowing services from the Federal Reserve. But every legally qualified entity can get a master account, and the regulations for eligibility will not change. In essence, this new streamlined master account will allow the Federal Reserve to give the green light to innovative banks, including fintech companies, stablecoin issuers and other payment companies. According to Eleanor Terrett, a reporter for Crypto In America, who was on the scene, this is significant for companies like Custodiabank and Krakenfx, which have been trying to obtain a master account with the Federal Reserve for years, with Custodia even taking the Fed to court. The move could also accelerate the process of obtaining accounts for companies like Ripple and Anchorage, both of which have already submitted applications this year.
Here is the full text of the speech:
Speaker: Governor Christopher J. Waller
Susan, thank you. Good morning, everyone. I'm delighted to welcome you to the Board of Governors of the Federal Reserve System for our inaugural Payments Innovation Conference. I'm organizing this conference with two goals. First, I want to highlight emerging technologies in decentralized finance and cryptocurrencies and how they fit into the mainstream payments ecosystem. I look forward to engaging in lively discussions between traditional payment giants and emerging players in decentralized finance. Second, I want to signal that we've entered a new era in payments at the Federal Reserve—one that no longer views the decentralized finance industry with skepticism or disdain. Instead, today we cordially invite you to join us in a conversation about the future of payments in the United States, right here on our home turf—a conversation that would have been unimaginable just a few years ago. As we all know, the technology-driven payments revolution is well underway, and I solemnly declare: the Federal Reserve will actively participate in this transformation. Numerous technological breakthroughs are reshaping the payments system: stablecoins and tokenized assets based on distributed ledger technology; the rapid adoption of artificial intelligence (AI); and the increasing integration of these innovations with the traditional financial ecosystem. This includes the institutions and infrastructure that underpin our economy's secure and efficient payments system, and of course, the Federal Reserve itself. This payments revolution is driving change across the board, and later I will detail several new approaches the Federal Reserve is exploring to support these innovations. I have previously discussed two fundamental models of payments innovation in market economies. The first is private-sector-driven innovation. The vast majority of innovation originates in the private sector—which has the greatest incentive and resources to allocate resources and take risks to explore new technologies. The second model occurs when public-sector institutions like the Federal Reserve build platforms and provide services that enable the private sector to more easily and quickly offer new services to customers. Such initiatives should be implemented only to meet specific market needs and within a limited scope. Public institutions, including the Federal Reserve, should adopt a stance that recognizes and embraces private sector innovation that improves the payment system, while maintaining its safety and stability. These safety and stability elements are as crucial to the new generation of innovators as they are to established institutions. Let me briefly reflect on how we got here. Since its inception, the Federal Reserve System has partnered with the private sector to improve the efficiency of the payment and settlement system. From its earliest days, the clearing services provided by the Reserve Banks eliminated the need for daily cash deliveries by armored train. Long before we even discussed "payment rails"—the payments infrastructure that drives today's innovation—the Federal Reserve was running trains on steel tracks to transport and clear paper checks across the country. In the early 20th century, Fedwire began transferring money between banks over telegraph lines. Today, we have multiple infrastructures that support real-time interbank transfers and settlements. This conference will focus on innovation driven by the private sector. We are bringing together 100 private sector innovators who are using cutting-edge technologies to create new possibilities in payments. Experts are committed to integrating traditional financial payment rails with distributed ledger technologies, developing new products and services in the digital asset ecosystem, and promoting the application of artificial intelligence in payments. Notably, the companies involved in these innovations include banks, asset management companies, retail payment institutions, technology companies, and native crypto-fintech companies. This shows that distributed ledgers and crypto assets are no longer fringe technologies, but are increasingly integrated into the cornerstones of the payment and financial systems. Before we hear from the innovators, I'd like to outline the Federal Reserve's role in supporting the private sector: both as a coordinator, solving collaborative challenges, and operating core payment and settlement infrastructure. We are also looking to the future, building experience within our own payment system through practical research on tokenization, smart contracts, and the intersection of artificial intelligence and payments. This effort aims to gain insight into innovation within the payment system, assess whether these technologies offer opportunities to upgrade our payment infrastructure, and foster deeper dialogue with the industry about new technologies. While this is a good start, I believe we can and should do more to support those actively driving change in the payment system. To this end, I have asked Federal Reserve staff to explore the concept I call "payment accounts." Currently, Federal Reserve branches offer master accounts and financial services to legally qualified entities, pursuant to the "Guidelines for Evaluating Applications for Accounts and Services." Payment accounts will be open to all legally qualified institutions and will be particularly valuable to businesses focused on payment innovation. The payment account concept is designed to provide basic Federal Reserve payment services to legal institutions that currently conduct their payments primarily through third-party banks that hold full master accounts. Many qualified businesses with significant payment activity may not require the full functionality of a master account or the full suite of Federal Reserve financial services to successfully innovate and serve their customers. The program aims to tailor new account services to the needs of the business and the risks they pose to the Federal Reserve and the payment system. Therefore, it is crucial that these low-risk payment accounts enjoy a streamlined review process. Payment innovation is advancing rapidly, and the Federal Reserve must keep pace. Specifically, I will describe a possible prototype of such a payment account (or "lite master account"): This account would provide access to the Federal Reserve's payment channels while effectively managing various risks to the Federal Reserve and the payment system. To control the size of the account and its impact on the Federal Reserve's balance sheet, the Reserve Bank would not pay interest on "payment account balances" and would likely impose a maximum balance. Such accounts would not have intraday overdraft privileges—payments would be rejected if the balance reached zero. They would not be able to borrow at the discount window, nor would they have access to all Federal Reserve payment services (because the Reserve Bank cannot control the intraday overdraft risk associated with these services). It should be clear that this is a preliminary concept, intended to illustrate possible future developments. In short, I believe the payments landscape and the types of service providers have evolved significantly in recent years, and this new type of payment account better aligns with this new reality.
As the Federal Reserve staff examines this proposal, they will consult with a wide range of stakeholders to gain insights into its pros and cons. Progress will be announced soon.
With this, I will conclude my remarks so that we can move on to the truly exciting part of this conference—the discussion on innovation and the future of payments. Thank you to the panelists for your time, to the attendees in person, and to the many online viewers. A special thank you to the Federal Reserve staff for their efficient preparations amidst a busy fall schedule. Now, let's get on with the conference!
Jasper
Jixu
Aaron
Hui Xin
Davin