Nichols Calls for Scrutiny of Chartering ‘Loopholes’ for Nontraditional Financial Firms

In an American Banker op-ed today, ABA President and CEO Rob Nichols urged the Federal Reserve to “take a very careful look” at the risks posed by nontraditional financial firms including cryptocurrency companies looking to gain access to the payments system.

“These entities see the value in getting access to Federal Reserve payments systems like the Fedwire Funds Service and the Automated Clearinghouse Network, but do not want to play by the same rules as traditional banks,” Nichols wrote, referencing a current movement in states and within the OCC to broaden the definition of entities eligible to receive a bank charter. “Finding chartering authorities that are willing to redefine what it means to be a bank introduces risks to the financial system’s safety and soundness, consumer protection laws and international reputation.”

Increasingly, companies are seeking bank charters to access the nation’s payment system while circumventing the strict regulations banks must adhere to, Nichols pointed out. For example, in 2019 Wyoming created a special-purpose depository charter targeting cryptocurrency businesses that requires those institutions to back up their deposits by holding 100% of their value in reserves, exempting them from FDIC or federal oversight.

“To protect consumers and the financial system, the Fed board should delay granting non-traditional entities like these access to master accounts or its payments services until a uniform policy can be adopted,” Nichols said. “This policy must first go through public notice and comment, and allow the Federal Reserve banks to use their discretion when evaluating requests from these nontraditional applicants.