Custodia Says Fed’s Attempt To ‘Crush’ Crypto Bank Was Political

Wyoming-based Custodia Bank argued Wednesday that the Federal Reserve Board misrepresented Custodia's crypto-friendly business model to prevent the state-run bank from acquiring payment and settlement systems.

39 pages ShortCustodia won the appeal, arguing that it would not allow any depository institution to tap into federal systems, or that the feds could not mitigate the risks associated with banking crypto companies.

Earlier this month, the 11 Federal Reserve banks that make up the Fed's working arm, in addition to the Kansas City Fed, argued that a “dangerous” precedent would be set if Custodia wins its appeal. It would effectively strip regional banks of their ability to mitigate risks to the financial system and themselves, the banks argued. Short.

Custodia filed an appeal after losing the case in April, in which the bank has the right to be called the main account in the Fed. That status allows Custodia to access the Fed's liquidity facilities and payment services such as FedNow, reducing Custodia's need to do relatively expensive business with intermediary banks.

Custodia charges, first presented He was on the Federal Reserve Board in 2022 It has improved After his application to become a member institution was rejected last year. In short, Custodia argued that the rejection was a “politically-determined outcome” of a high-level effort to isolate the digital assets industry.

“The political winds shifted, and the weight of the federal regulatory infrastructure was deployed to crush a small Wyoming bank,” Custodia said, adding that the Federal Reserve Board in Kansas City, which covers Wyoming, was initially supportive.

The Kansas City Federal Reserve Board has “changed its tune” on several occasions, Custodia argued. Custodia's risk management statement was changed from “strong” to “inadequate”, the bank cited other examples of how assessments had changed.

Additionally, Custodia said the business was “completely unregulated” by the Federal Reserve Board. In arguing that the proposal was flawed, Custodia pointed to regulation under Wyoming's banking division and a “decade of safe operating history.”

While Custodia's case hinged on the U.S. Court of Appeals' 10th Circuit's interpretation of banking laws, including the Financial Conduct Authority, Custodia's brief emphasized comparing the industry's headwinds to Operation Choke Point.

The Obama-era initiative targeted banks that do business with racketeers, payday lenders and gun manufacturers. The term “Operation Choke Point 2.0” was coined last year when regulators shut down crypto-friendly signature banks. appeared.

on her BlogCaitlin Long, founder and CEO of Custodia, has previously warned of the “politicization of banking.”

In a September briefing, he argued that the Fed's ability to default on bank accounts is a “fundamental and comprehensive risk management tool.” If Custodia wins, they argue, their ability to assess whether banks are conducting illegal transfers or have weak risk management controls will be harmed.

“These risks are not only theoretical, and they are not unique to crypto Industry” and the banks rejected the master account citing other depository institutions.

As a state-chartered bank, Custodia is governed by Wyoming law and regulated by the local regulator. And Custodia argued that the federation's business model statement flies in the face of the balance of power between the federal and state governments.

“Appellants' disregard of the state's banking laws is anti-national,” Custodia said. “Instead of trying to avoid federal regulation, Cstodia sought federal regulation by applying for FDIC insurance and applying to become a member bank.”

With the arguments fully documented, the Custodia file marks a major milestone in the years-long search for a master account. But before a decision is reached on the appeal, both sides will have the opportunity to present oral arguments in court in the coming months.

Edited by Andrew Hayward.