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The Federal Reserve’s recent decision to grant lesser-known banks access to its vast lending and credit facilities has sparked questions about possible conflicts of interest and favoritism at the U.S. central bank, FOX Business reported.
Numisma, a small bank based in Greenwich, Connecticut, received conditional approval for a so-called master account, which allows state-chartered institutions access to the Federal Reserve’s liquidity facilities, including payment services at wholesale rather than retail prices. Numisma is a privately held bank that describes itself as a “leading-edge, high-tech operations and services platform” and a “global distributor of U.S. paper currency.”
A master account is not only a coveted asset for any state bank seeking to establish itself, but also a mark of official approval from the nation’s top banking regulator. In recent years, the Fed has rejected most applications from other so-called Tier 3 institutions similar to Numisma that aren’t regulated at the federal level, according to banking executives and academics interviewed by Fox Business.
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So what gave Numisma the edge? Some bank executives point to its possible political influence.
Numisma co-founder Randy Quarles served as vice chairman and governor of the Federal Reserve during the Trump administration.
Former Vice Chairman of the Federal Reserve System Randall Qualls attends the U.S.-Canada summit in Toronto on April 4, 2023. (Getty Images)
In a statement, a Numisma spokesman disputed the claim that Qualls’ involvement with Numisma had any influence on the company’s master account approval.
“Randy Qualls had no formal or informal involvement in Numisma Bank’s master account application process, which occurred long after he retired from the Federal Reserve,” the spokesperson told FOX Business. “Mr. Qualls’ name was never mentioned in any discussions between Numisma Bank and the Federal Reserve during the application process.”
A spokesman declined to elaborate on why Numisma had the edge in getting the Fed’s approval.
Qualls declined to comment.
Bank executives told FOX Business that one of the main reasons the Fed denied other Tier 3 bank status was because those banks are state regulated and their deposits are not insured by the Federal Deposit Insurance Corp. However, FOX Business has learned that Numisma is also state regulated and not insured by the FDIC.
Federal Deposit Insurance Corporation Building, March 13, 2023, Washington, DC (Nathan Posner/Anadolu Agency via Getty Images/Getty Images)
“Numisma’s conditional approval is one of only two Tier 3 approvals by the Fed in recent years and is truly unusual,” said David Zaring, a professor of law and business ethics. The Wharton School of the University of Pennsylvania“I think the perspective here is pretty uncomfortable for the Fed. Here are people who know how the Fed wants to operate and who are benefiting from that inside information.”
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While some Fed experts say the Quarles connection likely wasn’t the only reason Numisma was given the account, questions have been raised in the past about whether former Fed officials influenced master account decisions. They point to the case of former Fed vice chair nominee Sarah Bloom Raskin and the now-defunct fintech bank Reserve Trust.
Ruskin said, Obama Administrationwas nominated by President Biden to succeed Quarles as vice chairman for oversight in 2022, but withdrew from the running after it emerged that he may have tried to influence the Fed’s decision in 2018 to grant the Reserve Trust a master account.
Former Pennsylvania Republican Sen. Pat Toomey has said in the past that Raskin contacted Kansas City Fed President Esther George in 2018 to lobby for approval of a master account on behalf of the Reserve Trust, which had initially been rejected a year earlier.
Federal Reserve (iStock/iStock)
Toomey made the comments in a 2022 letter to the Kansas City Fed that was reviewed by Fox Business. The Kansas City Fed subsequently granted the master account to the Reserve Trust.
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During Raskin’s ill-fated Senate confirmation hearing in 2022, Kansas City Fed officials said the decision to ultimately approve the Reserve Trust master account was not Raskin’s decision, but rather because changes in Reserve Trust’s business model made it eligible to open the account. After a dispute with Raskin, the Kansas City Fed canceled Reserve Trust’s master account. The bank scaled back operations shortly thereafter.
Sarah Bloom Raskin, a Federal Reserve Board member and nominee for vice chair for oversight, listens to senators during her confirmation hearing before the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill. (Bill Clark/Pool via Reuters/Reuters Photo)
Raskin and the Kansas City Fed did not respond to requests for comment. George did not return calls seeking comment. FOX Business was unable to reach Reserve Trust’s former executives.
Reserve Trust was billed as a fintech bank. Another benefit of Numisma’s master account approval is that its business model is considered more “plain vanilla” and not directly involved with banking fintech companies or the $2 trillion cryptocurrency business.
Caitlin Long, CEO of Custody Bank, a Wyoming-based fintech bank that stores crypto assets and was recently denied a master account, said her bank was denied access even though it has the same type of license and regulatory structure as Numisma.
Custodia has no ties to any former Fed officials.
“I’m speechless. Does this look like special treatment given by the Fed to another former insider just weeks after the Fed’s Inspector General ‘suspended’ its investigation into the Fed’s master account practices?,” Long said in a post on X on Tuesday.
“Just read what the Fed said about Custody Banks: 100% cash-retained, uninsured by the Federal Deposit Insurance Corporation, state-chartered banks with no federal regulators are inherently unsafe and unsound. The Fed’s Custody Bank veto order went into great detail about why these problems cannot be solved, and yet all of a sudden a bank with the same regulatory structure is being allowed by the Fed and has a former Fed Governor involved?”
Cryptocurrencies have drawn the ire of the Biden administration and federal regulators in recent years following the collapse of now-defunct cryptocurrency FTX, whose bankruptcy sent ripples throughout the U.S. banking industry and contributed to the collapse of regional banks including First Republic, Silicon Valley Bank, Silvergate and Signature Bank last year.
Representation of the cryptocurrencies Bitcoin, Ethereum and Dogecoin June 29, 2021. (REUTERS/Dado Ruvic/File Photo/Reuters Photo)
“The Fed’s concerns about the cryptocurrencies that Custody will be the only one to handle may also be one of the reasons the company’s request was rejected,” said George Selgin, senior fellow and director emeritus of the Cato Institute’s Center for Monetary and Financial Alternatives. “Clearly, the lack of deposit insurance is not necessarily a reason to disqualify a master account.”
The good news for crypto companies like Custody is that the tide is turning in Washington, DC.
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The U.S. Securities and Exchange Commission voted Thursday to approve a set of ETFs that track the daily price of Ethereum, the world’s second-largest digital currency, just 24 hours after the House of Representatives passed a bill laying the groundwork for a comprehensive regulatory framework for digital assets.
Last week, Congress also voted to overturn controversial SEC rules that would have made it harder for banks to seamlessly store digital assets and work with cryptocurrency companies.
Presumptive Republican presidential nominee Donald Trump has pledged to embrace cryptocurrency technology if elected in November’s election and began accepting campaign contributions in the currency this week.
