When I worked at the Federal Reserve, we used to joke that our job was to protect the status quo. The Fed’s mandate has long included financial stability, certainly not financial disruption. But Fed Governor Chris Waller’s speech at this week’s Fed Payments Innovation Conference calling on Fed staff to research the creation of a new “payments account” for non-bank payments providers is the first serious challenge to the notion that only banks are allowed to move money in the US and who is allowed access to the Fed’s balance sheet.
when i wrote in 2023 “Stablecoins are the battleground for the future of money,” I also meant that the real competition is now over who gets access to the monetary system – banks, fintechs or decentralized networks. Two years later, Waller’s proposal brought that fight to the Fed.
While both the UK and EU have comprehensive frameworks for payment providers such as e-money institutions, the US, in contrast, has no similar federal payments charter. Non-banks must comply with 50 state money transmitter laws or rely on bank partnerships. The Office of the Comptroller of the Currency’s long-discussed fintech charter never took off. This regulatory vacuum forced innovation into the gap – and helped pave the way for stablecoin issuers to become the de facto payments companies of the digital age. But these stablecoin issuers do not have access to Fed payment rails and typically need to partner with banks.
Governor Waller’s proposal for a “payments account” – which he called a “skinny master account” – would provide eligible non-bank institutions direct access to the Federal Reserve’s payments rails, but without the privileges traditionally granted to banks. Balances in these accounts will not earn any interest, may be subject to limits, and will not have daylight overdraft or discount-window access. Their sole purpose will be to facilitate payments.
For decades, every American transaction has ultimately depended on a bank account at the Fed. Fintechs, card networks and digital wallets can innovate in partnership with banks. A payments account would change this paradigm by opening a narrow, supervised corridor into the main monetary infrastructure – effectively creating a US payments charter through access to the Fed system rather than by law.
In many ways, Waller’s proposal revives the old idea of narrow banking – separating the payments function of banking from the credit creation function. Narrow banks hold high-quality, liquid assets and exist to move money, not to lend. The concept has come up repeatedly since the 1930s but has never gained popularity in the US until now.
This payment account could also reshape how stable coins fit into the monetary system. Payments Stablecoin issuers already operate as a narrow bank – holding fully backed reserves and facilitating payments rather than lending. Yet the Genius Act does not grant them direct access to the Fed payments rails, a move that would integrate these stablecoin issuers into the US monetary system.
If stablecoin issuers can hold reserves directly through a Fed payment account, their tokens will be backed only by central bank money. It will also provide the Fed with expanded tools to manage systemic risk arising from payment stablecoin issuers and bridge the divide between private and public digital dollars.
Stablecoins backed by Fed payment accounts would also provide a viable alternative to retail central bank digital currency. Gov. Waller has long been skeptical of a central bank digital currency issued by the Fed. His payments account proposal suggests a middle path: Let the private sector drive innovation at the forefront and keep the Fed behind it as a reliable settlement layer.
When I worked at the Fed, protecting the status quo became synonymous with protecting financial stability. However, stability also depends on adaptability – including the ability of central banks to innovate while maintaining control over their monetary levers. To quote the novel by Giuseppe Tomasi di Lampedusa. panther: “If we want things to remain as they are, things have to change.”