Analysis-Crypto giant Kraken's Fed payment account sparks concerns about risks

April 10 (Reuters) - Crypto giant Kraken's landmark Federal Reserve master account comes with restrictions aimed at mitigating risks, but it - and others likely to follow in its wake - could still create vulnerabilities for the U.S. financial system.

Founded in 2011, Wyoming-based Kraken is one of the world's largest crypto exchanges, with both retail and institutional clients. Last month, it became the first-ever crypto company to win a Fed master account. The Kansas City Fed granted Kraken a "limited- purpose" account for one year initially, but neither party disclosed details of its restrictions.

Fed master accounts are often likened to bank accounts for banks, letting accountholders move funds directly via the Fed's payment rails.

The decision has sparked concerns among banks and the top Democrat on the House of Representatives Financial Services Committee, Maxine Waters, over potential financial-system risks. They also say the approval process was opaque and that it flouted Fed protocols. Waters has asked the Kansas City Fed to disclose more details by Friday.

To be sure, banks stand to lose out as crypto firms expand onto their turf. But some regulatory experts said banks' risk concerns are warranted.

A spokesperson for Kraken told Reuters that the Fed master account allows its Wyoming banking arm to access the central bank's wholesale payments system, Fedwire, and hold limited balances overnight. That means it can cut out bank intermediaries and move money faster and more cheaply.

But unlike many accountholders, Kraken cannot earn interest on reserve balances it holds at the Fed, or access emergency Fed lending or the central bank's other FedNow and ACH payment systems, the spokesperson said. They declined to say whether Kraken will have access to Fed credit.

The account details have not previously been reported. Kraken will initially use ⁠it to serve wholesale clients. It hopes to eventually add new features, said Jonathan Jachym, Kraken's global head of policy.

"We look at this as a great testament to regulatory rigor and cooperation. It promotes principles of both safety and soundness, and innovation," said Jachym.

A Kansas City Fed spokesperson said it was reviewing Waters' letter. The spokesperson declined to comment further.

CRYPTO SYSTEM ⁠INROADS

Granted more than five years after Kraken first applied, the account marks another victory for the digital asset industry under President Donald Trump's crypto-friendly administration, which is giving the sector more access to the mainstream financial system, sparking alarm among banks.