- Key Insight: The Federal Reserve’s “skinny” master account proposal is moving quickly at the central bank, but experts say implementation will likely be stalled by litigation, either from challenger firms seeking master accounts or banks seeking to stop them.
- Expert Quote: “The question is who sues and why, and are they successful in getting a stay on implementation of the regulation until full review by the court.” — Todd Baker, Senior Fellow, Columbia University
- What’s at stake: Fed Gov. Christopher Waller set a timeline for the “skinny” master account proposal to be finalized by the end of 2026.
The Federal Reserve’s proposed “skinny” master account for fintechs and other nontraditional financial companies may move quickly towards finalization at the central bank, but experts say implementation will very likely be stalled by legal challenges from the banking industry or the challenger institutions.
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Todd Baker, senior fellow at the Richman Center for Business, Law & Public Policy at Columbia University, said lawsuits from either banking or fintech groups are foreseeable, especially in light of the Supreme Court’s 2024 decision to overturn Chevron deference, which reduced the level of judicial deference historically afforded to federal agencies.
“The question is who sues and why, and are they successful in getting a stay on implementation of the regulation until full review by the court,” Baker said. “The way the law has changed is the court doesn’t care what the Fed thinks anymore. The court is going to look at the words of the statute, which don’t provide a lot of clarity.
“It’s very unlikely that [the proposal] will be actually put into effect right away, even if the regulation becomes final,” Baker concluded.
Graham Steele, a former assistant secretary for financial institutions at the Treasury Department and academic fellow at the Rock Center for Corporate Governance at Stanford Law echoed similar sentiments, noting the Fed will face criticism or litigation from stakeholders regardless of how it proceeds.
“They’re sort of damned if they do and damned if they don’t,” he said. “If they put in the restrictions the banks want, then fintech firms aren’t going to want to use it in this case. If they lighten up and they dial them back, then they could get sued — so they’re going to get challenged in either direction.”
Nonbanks rising
The creation of the account comes as fintech firms have gained market share in the financial system, but have been hindered by operational limits. A recent report by the
The Fed’s “skinny” account would allow limited access to fintech companies operating in payments. Under the proposal, skinny account holders would have access to the Fedwire Funds Service, the National Settlement Service, FedNow and Fedwire Securities for free transfers only. Firms would also face an overnight balance cap equal to the lesser of $500 million or 10% of total assets.
The account could benefit fintech firms seeking limited access to the Fed’s payment rails, such as remittance companies. It could also create a pathway for certain state-chartered institutions to access those systems without having to rely on third-party banking partnerships, which can be fraught for various reasons, according to University of Wyoming College of Law Dean Julie Hill.
“The reason these nontraditional payment providers — especially in the crypto space — want access to a master account is because banks either don’t want to play ball with them, or they play ball with them for a little bit and then they cut them off, or they play ball with them a little while figuring out how their business model works, and then steal
it,” said Hill.
Finding the ‘middle lane’
Both fintech and banking trade groups
Fintech organizations say the prototype is too restrictive and would force them to continue relying on third-party banks, while banking groups are seeking stronger oversight of firms eligible for the account. Even with sharp divisions emerging over the idea, the central bank is targeting
Fed Gov. Christopher Waller in a February appearance said he is being pulled in
“So it’s finding the right kind of middle lane that I’m trying to get to with this ‘skinny’ account,” Waller added.
David Zaring, an associate professor at the University of Pennsylvania, said the prototype strikes a balance between expanding access and limiting risk.
“Sometimes, if nobody’s happy with your proposal, it’s evidence that you’ve struck a middle ground,” said Zaring.
‘A cage match’
Stakeholders say the proposal could satisfy some state-chartered institutions seeking full master accounts — namely Custodia Bank, a Wyoming special purpose depository institution providing digital asset custody and other crypto services that was
At the time, the Fed cited “deficiencies in Custodia’s risk management and controls framework in relation to Custodia’s limited basic banking activities” as the reason for the denial. Custodia then filed suit against the central bank to compel and the
Steele said this could be an option for firms like Custodia, but even if it is, the “skinny” master account wouldn’t provide all of the bells and whistles that these institutions are looking for. Whether the skinny account goes far enough to resolve Custodia’s lawsuit, however, is an open question.
“This does seem like one potential workaround to have those firms be able to get access,” said Steele. “But I think you hear from the objections the crypto firms have that there are still some ways in which this is not accommodative enough.”
Custodia did not immediately respond to a request for comment.
Despite the tensions, Baker said innovations in payments can be beneficial if implemented with care — or disastrous if they are not. Finding the right balance of innovation and safety is exceedingly difficult when so many companies’ profit margins and market shares are on the line, he said.
“The goal should not be to make the shareholders of one group of companies richer — it should be to maximize the benefit to all participants in the economy, because payment mechanisms aren’t really important in and of themselves,” Baker said. “They’re important as far as they serve the productive purpose that defines finance — helping businesses, individuals and governments transmit money. Unfortunately, it ends up being viewed as a cage match.”
