On the eve of the Federal Reserve Board’s deadline last week to reconsider Custodia Bank’s application to become a member institution, CEO and founder Caitlin Long told Decrypt she doubted it would be approved.

She was right.

The Fed denied the application, saying in a short announcement that Custodia’s business plan is “inconsistent with the required factors under the law.“ When the board initially denied the application on January 27, it was more specific: “The firm’s novel business model and proposed focus on crypto-assets present significant safety and soundness risks.”

But there was other news, too. U.S. District Judge Scott Skavdahl denied a motion to have Custodia’s lawsuit against the Fed dismissed. That makes it more likely (but doesn’t guarantee) that the question of whether the Kansas City Federal Reserve properly handled Custodia’s application will be answered in court.

“From our perspective, we were pushed into this,” Long said about the lawsuit.

The bank is a Wyoming-chartered special purpose depository institution, meaning that it can custody crypto on behalf of its customers. It originally filed its application for a federal master account in October 2020, a month after San Francisco-based crypto exchange Kraken did the same for its own crypto bank. By early 2021, a representative of the Kansas City Fed told Custodia its application featured “no showstoppers,” according to the lawsuit.

At the time, Long thought a decision was imminent.

Getting a master account would grant Custodia access to the FedWire network, which handled roughly 200 million transfers for its 4,700 member institutions last year. It’s specifically designed for large sums of money to travel from one bank to another. In 2022, FedWire transfers totaled more than $1 quadrillion for the first time since its inception in 1987.

If Custodia got access to FedWire, it would eliminate the need for the crypto bank to broker a deal with an intermediary to handle large transactions with other institutions on its behalf. Without the need for a third party, who would undoubtedly take a fee, Custodia could offer competitive rates to its large institutional clients.

By June 2022, more than a year after the “no showstoppers” comment, Custodia still hadn’t received a decision on its application. The bank filed a lawsuit against the Kansas City Fed and the Federal Reserve Board of Governors for the “patently unlawful delay.” Then in January, the Kansas City Fed formally rejected Custodia’s application and, after being asked to consider a revised business plan, doubled down on its decision last week.

For banks that don’t have their roots in the crypto industry, decisions on master accounts usually arrive in a matter of days, attorney Jason Finger, of Proskauer Rose law firm, told Decrypt in an email.

“Traditional financial firms typically receive approval on their application for a Federal Reserve master account in several days. Absent crypto-focused congressional legislation, federal regulators take a patchwork approach to studying and regulating crypto,” he said. “A final, public resolution of this case should give much-needed clarity to crypto firms applying for Federal Reserve master accounts, which, in Custodia’s case, took two years to reject.”

The Kansas City Fed has argued that its rejection, however late, makes Custodia’s complaint against it irrelevant. But now that a judge has said he disagrees, Custodia might get its day in court.

“We believe this is the first case in which claims seeking to compel the grant of a master account have proceeded beyond the motion to dismiss stage,” wrote attorneys David Gassett, Stephen Gannon, and Lisa Richards of Davis Wright Tremaine law firm in a blog post. “The Court’s emphasis on the importance of developing the factual record should significantly benefit Custodia as defendants’ delay appears excessive on its face.”

DWT is the same law firm that penned an amicus brief in support of Custodia Bank on behalf of the Wyoming Select Committee on Blockchain Technology.

By doing so, Wyoming’s blockchain committee joined Republican lawmakers, including Sens. Cynthia Lummis (R-WY), Steve Daines (R-MT) and Kevin Cramer (R-ND), who submitted their own amicus brief in support of Custodia Bank in September.

When she spoke to Decrypt last week, Long said Custodia’s path has been a lonely one. The way she sees it, the rest of the crypto industry has either stayed offshore to avoid unclear rules in the U.S. or decided to forge ahead without clear regulations.

“We’re in the third group, and we’re pretty much alone. We’ve asked for permission for everything, and we didn’t get permission. And so what we did when we didn’t get the permission, which was confirmed simultaneously with the denial, we said we’re cutting out the stuff for which they didn’t give us permission, and we resubmitted the business plan.”

That included ditching plans to launch a stablecoin, which the Fed specifically cited when it first rejected Custodia’s application. But of course, that didn’t work.

In October, while her legal team was battling the first of two now-denied motions to have Custodia’s lawsuit dismissed, Wall Street stalwart BNY Mellon, which is regulated by the Fed, announced that it was launching Bitcoin and Ethereum custody services.

Days later at a conference, Long blasted the Fed for what she called hypocrisy in calling Custodia Bank’s crypto focus risky but allowing BNY Mellon to launch its own crypto product.

Then when crypto exchange FTX collapsed amid accusations of fraud and commingled funds in November, Long realized that her attempts to warn regulators about bad actors in the industry had fallen on deaf ears.

Last month she wrote in a blog post that she “handed over evidence to law enforcement of probable crimes committed by a big crypto fraud” months before a wave of crypto market contagion wiped out billions of dollars worth of assets in 2022.

She took particular exception with a speech in which Sen. Dick Durbin (D-IL) compared Custodia to “a 29-year-old accused fraudster who is now wearing an ankle bracelet.”

“The reality is I was never at the table with the decision-makers,” Long said. “Jay Powell and Gary Gensler were all too happy to take meetings with Sam Bankman-Fried, but every time I asked for similar meetings, including with Powell, I was rebuffed.”

Source: Decrypt.co

The post Crypto Bank Custodia Is Taking on the Fed—Here’s Everything You Need to Know appeared first on Crypto Breaking News.

---

Filed under: News - @ March 2, 2023 6:56 pm