The Fed Payment Account Freezes Novel Charter Access

The Federal Reserve’s proposed payment account would let eligible firms settle on Fedwire and FedNow with overnight balances capped at $1 billion. The account would pay no interest and would not expand who is legally eligible for Fed services.

Governor Christopher J. Waller first floated the product in October 2025 as a skinny master account for payments specialists. The Board later sought comment, then issued a May 2026 proposal that also pauses many full master-account decisions.

The Account Pays Nothing and Caps Overnight Cash at $1 Billion

A payment account would be a special-purpose record at a Reserve Bank, used to clear and settle the holder’s own payments. It is a different product from a master account, which is how banks now hold balances and tap Fed services. Legal eligibility would not change. Any firm that can already ask for a master account under the Federal Reserve Act could ask for a payment account instead.

The May proposal keeps the account on a short leash. Reserve Banks would exclude Payment Accounts from interest on reserve balances, and holders could not park leftover cash in excess balance accounts. There would be no discount-window borrowing and no daylight overdrafts. If the balance hits zero, the payment is rejected. Each Reserve Bank would set a Closing Balance Limit from expected payment flows, not to exceed $1 billion. The Board’s own review of five years of closing-balance data found that $1 billion would cover about 97 percent of existing account closes.

Access would be limited to services that can automatically refuse an overdraft: the Fedwire Funds Service, the FedNow Service, the National Settlement Service, and the Fedwire Securities Service for free transfers only. FedACH would stay out. A payment account would not make the holder a correspondent for other firms. The Board also said a payment account should not be read as a step toward a master account. A later request for a master account would still get a full review under the Account Access Guidelines.

MASTER ACCOUNT VS PAYMENT ACCOUNT

Reserve Banks would generally be expected to finish payment-account reviews within 90 calendar days of receiving a complete file, and to consult Board staff before stretching that clock. Tier 1 firms (federally insured institutions and certain affiliates) would get a 45-day target for either a master account or a payment account.

What Changed From December’s Prototype to May’s Rule

Waller used the Board’s first Payments Innovation Conference on October 21, 2025, to ask staff for a skinny master account prototype. About 100 private-sector firms sat in the room. He said the defi industry was no longer viewed with suspicion or scorn, and that payments innovation moves fast enough that the Fed has to keep up. His sketch already had the core limits: no interest, possible balance caps, no daylight overdrafts, and no discount window.

There are many eligible firms engaged in substantial payments activities that may not want or need all the bells and whistles of a master account, or access to the full suite of Federal Reserve financial services, to successfully innovate and provide services to their customers.

Christopher J. Waller, Governor, Board of Governors of the Federal Reserve System, Payments Innovation Conference, October 21, 2025

The Board put a prototype out for comment on December 19, 2025, and published it in the Federal Register on December 23 as Docket OP-1877. Comments were due February 6, 2026. The Board received 72 letters from banks, credit unions, money transmitters, non-traditional firms, trade groups, and academics.

@federalreserve requests public input on “payment account,” which eligible financial institutions could use for the limited purpose of clearing and settling their payments: https://t.co/qlWK9fObui

— Federal Reserve (@federalreserve) December 19, 2025

FROM SPEECH TO FORMAL PROPOSAL

1. October 21, 2025: Waller asks Fed staff to explore a payment account, which he also calls a skinny master account.
2. December 19, 2025: The Board requests public input on the prototype and says a payment account would not pay interest, would not have Fed credit, and would face balance caps.
3. February 6, 2026: The 45-day comment file on Docket OP-1877 closes; 72 comments come in.
4. March 4, 2026: The Federal Reserve Bank of Kansas City approves a separate one-year limited-purpose account for Kraken Financial.
5. May 19, 2026: President Donald J. Trump signs Executive Order 14405 asking the Board for a report on payment-account access.
6. May 20, 2026: The Board issues the payment-account proposal and related rewrites of the Payment System Risk policy, Regulation A, and Regulation D.
7. July 27, 2026: Comments on the May notices close. No final rule has been issued.

The biggest design change from winter to spring was the overnight cap. The December prototype pointed to the lesser of $500 million or 10 percent of the holder’s assets. Commenters said an asset test was a poor fit for a payments firm. The May text drops that formula. Each Reserve Bank would set a limit from expected flows, still capped at $1 billion, and could allow a short overrun in unusual cases, with Board consultation if the figure crosses $1 billion or the overrun lasts two straight business days.

Interest, Credit and ACH Stay With the Banks

The second-order result sits in those withheld tools. A master account can earn interest on reserve balances, borrow at the window, run a daylight overdraft under the Payment System Risk policy, and originate ACH. A payment account would do none of that. For a stablecoin issuer or a payments processor, the missing ACH file is not a minor extra. Batch payroll, bill pay, and a large share of consumer credits still travel that network. The Financial Technology Association told the Board that leaving FedACH out would leave payment firms on bank intermediaries for a substantial portion of activity, which undercuts the cost and risk cut that direct access is supposed to buy.

WHAT A PAYMENT ACCOUNT WOULD NOT INCLUDE

• Interest: Overnight balances would earn nothing, so the account is a settlement box, not a reserve investment.
• Credit: No discount window and no daylight overdraft; a zero balance stops the payment.
• FedACH: No automated clearing house, so many retail and payroll flows still need a bank with a master account.
• Correspondent role: The holder could not settle for other institutions on the services it does get.
• A master-account ticket: Holding a payment account would not count as progress toward full access.

Zero yield is the point, in the Board’s telling. Many of the 72 RFI commenters backed paying nothing, arguing that interest would turn the account into a store of value, pull deposits out of commercial banks, and complicate monetary policy. Other letters wanted interest, at least up to a threshold, because a barren balance is expensive to keep and may be drained each night, which is a poor settlement buffer. The Blockchain Association later put the same objection in public: a zero-interest rule would discourage firms from holding the cash they need to settle. That tension is the product. Banks keep the yield and the credit line. Newcomers get a rail that works only when they prefund it.

Kraken Got a One-Year Pilot Before the Pause

The Federal Reserve Bank of Kansas City did not wait for the Board’s new product. On March 4, 2026, it approved a limited purpose account for Kraken Financial, the Wyoming special-purpose depository institution of Payward Financial. Kraken Financial is a Tier 3 firm under the Account Access Guidelines. The account runs for an initial term of one year, with limits the Kansas City Fed said were tailored to the firm’s model. President Jeff Schmid said the payments landscape is evolving and that the integrity of the U.S. payments system remains the priority.

That approval is not the Payment Account in the May notices. It is a restricted master-account grant under the existing guidelines, issued after Kraken’s 2020 application and before the Board finished the new rule. Vice Chair for Supervision Michelle Bowman later called the one-year term a pilot and said she would not describe it as opening the flood gates. Paige Pidano Paridon, co-head of regulatory affairs at the Bank Policy Institute, said the Kansas City Fed had front-run the Board’s comment process and had given the public no view of the controls imposed.

The sequence is the policy. One crypto-native SPDI is already settling, on a clock and a leash, while the Board tells Reserve Banks to pause other Tier 3 master-account decisions until the payment-account work is done. The pause is expected to end on or before December 31, 2026.

Three Tier 3 Approvals in Three and a Half Years

The Account Access Guidelines, adopted in 2022, sort applicants by how close they sit to a federally insured bank. Tier 1 is insured. Tier 2 is uninsured but under federal bank supervision, or owned by a Fed-supervised holding company. Tier 3 is eligible, uninsured, and outside that federal net, including many state special-purpose charters. Congressional Research Service tallies of the Board’s master-account database show the filter at work.

THE ACCESS RECORD, DECEMBER 2022 TO MAY 2026

• Tier 3 approvals: Three master accounts granted from December 23, 2022, through May 31, 2026.
• Tier 2 approvals: None in that window.
• Fallout: About half of Tier 3 applicants withdrew or were rejected; others sat pending for years.
• Uninsured holders: 357 institutions without federal deposit insurance held master accounts as of May 31, 2026, about 4 percent of all holders, most of them older foreign-bank or credit-union accounts.

Custodia Bank, a Wyoming SPDI founded by Caitlin Long, is the long case. The Kansas City Fed denied its master account in January 2023. A Wyoming district court sided with the Fed in 2024. The U.S. Court of Appeals for the Tenth Circuit affirmed in a 2-1 panel decision on October 31, 2025, holding that Reserve Banks have discretion to refuse eligible applicants. The full court denied rehearing in March 2026 by a 7-3 vote. Custodia asked the Supreme Court to take the case in July 2026. The payment-account proposal does not reopen that file. It offers a different, thinner product to the next applicant who still wants a direct settlement account.

Barr’s Dissent Turns on Who the Fed Can Examine

Governor Michael S. Barr has objected at both steps. On December 19, 2025, he said he backed the idea of a prototype but could not support the request for information, because it was not specific enough about safeguards against money laundering and terrorist financing by firms the Board does not supervise. On May 20, 2026, he dissented again. He said there had been some progress, and that the remaining hole was still too large, including the lack of examination of AML compliance procedures.

While I remain supportive of the concept of the Federal Reserve developing a payment account prototype that it might provide to legally eligible institutions, I cannot support this set of proposals because it does not provide sufficiently specific and robust safeguards to protect against the accounts being used for money laundering and terrorist financing by institutions we do not supervise.

Michael S. Barr, Governor, Board of Governors of the Federal Reserve System, statement on the Payment Account proposal, May 20, 2026

The May text does let a Reserve Bank demand BSA and OFAC information, including exam results and third-party reviews. Barr’s point is that asking for paper is not the same as sending examiners. Community-bank groups have pressed a related line: access should stay tied to prudential oversight, and new entrants should not assemble bank-like activity without bank-like supervision. The Board’s answer is the skinny product itself. Lower residual risk, in its view, is what makes a 90-day review defensible.

A White House Report Is Due September 16

The day before the May notices, Trump signed Executive Order 14405, “Integrating Financial Technology Innovation into Regulatory Frameworks.” Section 4 asks the Board for a comprehensive evaluation of Reserve Bank payment access for uninsured depository institutions and non-bank financial companies, including digital-asset firms and direct participants in instant-payment networks. The report is requested within 120 days of May 19, 2026, which is September 16, 2026. It is supposed to cover legal authority, options for expanding access, statutory blocks, and whether each of the 12 Reserve Banks can grant or deny accounts on its own.

If the Board finds that current law already allows direct access for those covered firms, the order asks it to set transparent procedures and to decide complete applications within 90 days. That clock is the political overlay on Waller’s product. The Payment Account notices still refuse to widen legal eligibility. The order asks whether the law is wider than the Board has been willing to read.

Comment letters on the May package closed on July 27, 2026. The Tier 3 pause is slated to lift on or before December 31, 2026, if the Board stays on that calendar. Until a final rule posts, the only live experiment is Kraken’s one-year account, and the only finished legal holding is that a Reserve Bank may still say no. The payment account, as written, would let a legally eligible firm move money on Fedwire and FedNow without earning a dollar on the balance it has to leave overnight.

Disclaimer: This article is news reporting on Federal Reserve proposals, Reserve Bank account decisions, court rulings, and a White House order. It is for information only and is not legal, investment, banking, or cryptocurrency advice. Firms or people who may apply for a Reserve Bank account, change how they settle payments, or hold digital-asset reserves should consult a qualified banking lawyer or compliance officer before acting. Figures, dates, and account terms reflect the official notices and statements cited here and may change if the Board adopts a final rule or if a Reserve Bank alters a live account.