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 urging Fed staff to explore the creation of a new “payment account” for non-bank payment providers at this week’s Fed Payments Innovation Conference marks the first serious challenge to the assumption that only banks can move money in America and who has access to the Fed’s balance sheet.
When I wrote it in 2023 “stablecoins are the battleground for the future of money,” I also believed that the real competition was about who gets access to the monetary system – banks, fintechs or decentralized networks. Two years later, Waller’s proposal brings that fight to the Fed itself.
While the UK and the EU both have comprehensive frameworks for payment providers such as e-money institutions, the US, by contrast, has no similar federal payments charter. Non-banks must navigate 50 state money transmitter laws or rely on bank partnerships. The Office of the Controller of the Currency’s long-touted fintech charter never took off. This regulatory vacuum forced innovation into the gaps – and helped pave the way for stablecoin issuers to become the de facto payments companies of the digital era. But these stablecoin issuers have no access to Fed payment rails and generally must work with banks.
Governor Waller’s proposal for a “payment account” — what he called a “skinny master account” — would give eligible non-bank institutions direct access to the Federal Reserve’s payment rails, but without the privileges traditionally granted to banks. Balances in these accounts would not bear interest, could be subject to caps and would not result in daylight overdrafts or discount window access. Their sole purpose would be to facilitate payments.
For decades, every American transaction has ultimately depended on a bank’s account with the Fed. Fintechs, card networks and digital wallets could innovate in partnership with banks. A payment account would change this paradigm by opening a narrow, monitored corridor into the central monetary infrastructure—in effect, creating an American payments charter through access to the Fed system rather than through legislation.
In many ways, Waller’s proposal revives the old idea of narrow banking – separating the payment function of banking from the credit creation function. Small banks have high-quality liquid assets and exist to move money, not lend it. The concept has surfaced repeatedly since the 1930s, but never caught on in the United States—until now.
This payment account could also reshape how stablecoins fit into the monetary system. Issuers of stablecoins already function as a form of narrow banking – with fully secured reserves and facilitating payments rather than lending. Yet the GENIUS Act does not give them direct access to Fed payment rails, the one step that would integrate these stablecoin issuers into the US monetary system.
If stablecoin issuers could hold reserves directly through a Fed payment account, their tokens would be backed by central bank money itself. This will also give the Fed expanded tools to manage systemic risks arising from payment stablecoin issuers and bridge the gap between private and public digital dollars.
Stablecoins backed by Fed payment accounts would also offer a viable alternative to a retail central bank’s digital currency. Governor Waller has long been skeptical of a Fed-issued central bank digital currency. His current account proposal suggests a middle ground: Let the private sector innovate on the front end and keep the Fed as the trusted settlement layer behind it.
When I worked at the Fed, protecting the status quo felt synonymous with protecting financial stability. However, stability also depends on adaptability – including the ability of central banks to innovate to maintain control of their monetary leverage. To quote Giuseppe Tomasi di Lampedusa’s novel The leopard: “If we want things to stay the way they are, things will have to change.”
