Welcome to this special live episode of Crypto in America. I'm here at the Federal Reserve building in Washington DC for the first ever Federal Reserve payments innovation conference and I'm here with the guy who put this entire thing on, Federal Reserve Governor Christopher Waller. Thank you so much for joining us today, Governor Waller. We're so excited.
I know. I know. We've seen each other at a few conferences and we're excited to kind of get into the details of the conference and there's a lot of news to cover with you, too.
But I did want to start off by asking you, you are on the short list to succeed Chairman Jerome Powell and I understand that you had an interview recently with Secretary Scott Bessent. Can you give us an idea of how that interview went? What goes into an interview for something as big as chair of the Federal Reserve?
So I mean a lot of the discussion as I mentioned before was really just about economics, monetary policy, the Fed, the economy, even stuff on payments, the size of our balance sheet. I mean these are kind of conversations I love. I can talk about this stuff all day long. So it was an hour and 45 minutes and it went just like that. I mean so fast. But yeah, that was it. It was just a really, really good discussion. Scott asked a lot of good questions and I think I answered them okay because I haven't been thrown overboard on the ship yet.
Do you want to be Fed chair?
I, you know, if the president thinks I'm the best choice and if you ask me I'll do it. But that's up to the president's side, not me.
Yeah. Well let's move into the news we broke, well you broke actually today this morning at the Fed's innovation conference: the skinny master accounts. I want you to give us an overview, but from what I understand, it's basically a new way of giving non-banks or fintech companies, stablecoin issuers access to a master account without going the full monty, basically a Fed master account light, if you will. Can you explain to our listeners what that entails?
All right. So, first of all, it's for eligible depository institutions. That's in the language of the Federal Reserve Act. So it's not just fintech firms or stablecoin issuers. You have to have a certified kind of a bank charter, like the SPDI accounts in Wyoming or the trust charters that a lot of the firms are applying for now. They then are eligible to request a master account. So that's the set: you have to go through these processes to get a bank charter to ask for a master account. Now, at the Fed, we have a tier one, tier two, tier three risk category for these various bank charters. If you're in one and usually two, you get this full-fledged, full service, I like to call it the luxury master account. And then the issue is with the tier threes, do you just say no or yes? And then you give them the full thing. So my thinking on this was, why don't we tailor the structure of the master accounts to fit the risk profile of the bank charter? And by doing so, you kind of control the risk that we face when we issue these things. So what I had in mind was I announced kind of a prototype. It was just my way of framing this to get the conversation going and thinking about it. These would be accounts that don't pay any interest, unlike a true master account reserves in a bank. There would be possible caps on the size because if it's truly designed to be for payments, that's the purpose of this account. What do you want it for? If it's mainly for payments, which a lot of these firms really want to do, certainly a stablecoin issuer, then okay, tell me what your average daily volume is that you need to run through the payment rails. Now, they're also 24/7, so the money has to always be there. They can vary it time of day if they need to for liquidity management, but the idea is there's a cap that controls how much exposure we have, size of my balance sheet, which a lot of people get bent out of shape about. So that would be one. And then you would not be eligible for what are called daylight overdrafts. So during the day, if you're a bank and your account goes negative, we provide you the credit to make sure the payment gets made and then at the end of the day, you have to settle up. With these accounts, if you hit zero, payments will be rejected. So there's no credit extended from the Fed. Again, there's no discount window. So the whole idea is there's a lot of services. If you're really just a payment firm, you don't need all this other stuff. And so therefore, it makes it a lot easier for us to control the risk the Federal Reserve banks and the payment system are exposed to based on the characteristics of your bank charter. So that's the idea, to tailor these things and then we don't have such a big decision of if you're in this tier three, do we give you the full gold medal or do we say here's a bronze, you know, you really need the bronze, it's good enough.
You're leveling the playing field.
We're matching the risk profile of the bank to what we give them access to, to minimize our risk. And that's what we weren't doing before. So I think it's a pretty good innovation. We'll see where it goes.
You mentioned a prototype. When can we expect guidelines on something like this?
Well, that's the thing. We have to sit down and think about what we want to do. We'll get some feedback. I'd like to get some feedback from the industry about aspects of this, problems with it. Even within the Fed, my colleagues who are present, the reserve banks have already given me a bunch of feedback on why we should not do X or why we should do Y. And that's the kind of stuff we have to sort out. The other thing is just technically, can we do these things like cap the accounts, monitor it fully all day long. How do we ensure the money stays in overnight and isn't lent out in the Fed funds market? These are more technical things. We've never done it. So I have to see what the technical expertise is, but the idea is not to take two or three years to do this. The idea would be if we could do this in a year, I think that'd be fantastic.
Yeah. And this is a big deal for companies like Kraken, Custodia. They've been seeking master accounts for a long time now. How do you see something like this affecting the Custodia case?
Well, that would be the thing. We could look at both Custodia and Kraken. Circle applied through the Bit Trust charter. And we can look at the structure. One of the things we're always concerned about is AML and money laundering. Do you have the proper controls in place? How are you going to monitor this stuff? How can we do it? Are the regulators going to have the right models? And then we can say, look, because we're limiting the risk you pose to us, we'll have a much faster and quicker approval process. We won't take six years and have to go to court. That's my hope. That would be the goal of trying to do this.
And then I also want to chime in here. Governor Waller, thank you so much for taking the time to join us with Eleanor in person and me and Gerald virtually. Unfortunately, we're just on the go, so we couldn't make it, but we're seeing more crypto companies seek out federal trust charters. Just last week, Governor Barr warned about the risk of the trust charter in the context of stablecoins. Do you believe that trust regulation is the same as banks? And should they be able to call themselves banks?
Well, this is what was concerning to me: that everybody was trying to manipulate the system to somehow get something that's an eligible bank depository institution. It's like I'm trying to come in the back door, the side door to get a master account. I personally would just say, 'Look, come in the front door. You want to do X, tell me what X is in a payment, and then we'll construct a master account that would satisfy that. And if you don't behave, we could just cap the thing at zero and that would be the end of it until you get your performance back up to snuff or any of your other compliance issues have to be put in place.' So that was what I wanted to do: avoid everybody doing these backdoor bank depository charters and then we have to worry about some regulator looking at it. That was what I was trying to avoid. Hopefully this is a way instead of dealing with all that: come in, you really want to do payments, here's the account, very limited. We might start small at first, see how you're running it, see how you're managing, and then we can think about expanding out. But that's really the idea: to come to some kind of compromise and get people to come in the front door. Just what do you want it for? If it's just payments, that's fine. We can think about a very simple way to do a payment account. That's why I prefer to call it a payment account, but 'skinny master account' seems to be what people understand.
Yeah. Governor Waller, it's really good to see the Fed lean into innovation. It's such an exciting time for the industry and financial technology overall. We're obviously a pro-America podcast here. In the past, you've been critical of Europe for regulating emerging technology in a way that really killed innovation in the cradle. Many in our industry have been critical that the Fed under the previous administration was guilty of some of the same behaviors. You were on the board at that time. Why do you think the industry was so vulnerable to things like debanking and what we've deemed Operation Chokepoint 2.0? What's your take on that period in history?
Well, I have a different view of it. I always try to use this example, so if you've heard me do this, please bear with me, but it illustrates the point very easily. Whenever there's a transaction, you're buying something and you're paying for it with something. And then there's a technology for doing that transaction. And then there's a technology that records the history of that transaction for proof of ownership. So I go to Whole Foods, I buy an apple, I pay with a dollar in my bank account, I take my debit card, I tap it on a reader, and it spits out a receipt. With a crypto object, you're going to buy a crypto object. You pay for it with a stablecoin. You use a smart contract to do the transaction. You record it on blockchain. If I took out the word 'crypto' in the first stage, the last two things are just technology. They're just technologies for how to conduct a transaction, how to record the transaction. There's nothing evil or dangerous about it. But because it got tied up with this word 'crypto', this object that you were buying, it all became evil. I don't mean that literally, but it became dangerous, suspicious, and we just couldn't have it. And I used to argue, look, get the word 'crypto' out of there. This is just technology on the other side. Let's just think about the technology, which was the point of this conference today. Let's just think about the technology stuff. I don't really want to talk about the assets that are out there in the crypto world that people are talking about. So that's been my position for a long time. And with the change in the administration, the change in attitude towards the whole thing, it was just a good time to say for the Fed, let's again put the crypto stuff aside other than stablecoins, which I like as a payment instrument. Let's just talk about technology and how it can be used in the DeFi world, how it's coming into TradFi. And then just work together. That's the theme I'm getting at all the payments conferences: both sides are increasingly asking how do we work together and use this technology to make the payment system better, faster, cheaper.
Right. I mean, with the GENIUS Act, it gives the Fed and other banking regulators a lot of discretion in how it's implemented. Going back to the point we were discussing before, I'm curious, how do you balance the priorities of protecting the banking system, making sure innovation isn't stifled, while also ensuring stablecoins actually work as a payment tool?
Well, there's a couple things in the GENIUS Act. One is it gives banks the ability to issue their own stablecoins. The way I always try to explain it to people is most of the banking regulation, the regulators, the OCC, the FDIC, the Fed, they're looking at how do we let the banks issue a stablecoin in a safe, sound way that doesn't threaten financial stability. Once that's done, the stablecoin is just a payment instrument and then it comes over to me. I'm the payments oversight governor. So it's like checks or ACH or any other kind of FedNow payment, real-time payment, that's all under my purview. Even though the banks are doing it, it comes under the payments oversight. So I need to be involved to understand what the regulations are going to do, how this affects payments and things like that. In the GENIUS Act, there's also the ability for non-bank financial intermediaries to issue a stablecoin. Now, there's nothing in the GENIUS Act that says you get access to a master account. And I just explained that the Federal Reserve Act says you have to be an eligible depository institution, but these non-bank financial intermediaries are going to be payment firms. And a lot of that stuff is going to potentially impact me through the payment system and the payment rails. So that's how I think about it: there's the whole bank stuff and then there's the non-bank stuff. And I'm more involved in the non-bank stuff, trying to make sure the regulation everything gets done right that way.
Legally eligible. Now, is that the Wyoming SPDIs and companies listed under the OCC or regulated under the OCC?
Well, from what I understand, I'm not a lawyer, but from what I understand, these are legally eligible. Now, they can request. It doesn't mean you get one. Let's be clear. It just says you're able to request. If you're a non-eligible depository, you can't even ask.
So that's the fundamental difference. The Fed's discretion.
