In a significant ruling, a federal judge has dismissed Custodia Bank Inc.’s claim for entitlement to a Federal Reserve master account, marking a setback for the Wyoming-based depository institution. Custodia Bank argued that the Federal Reserve Bank of Kansas City (FRBKC) was legally obliged to grant its application for a master account, a critical financial […]
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Custodia Bank Goes Live: Bridging Digital Assets With US Dollar Payments
Custodia Bank, the financial institution that aims to bridge digital assets with the U.S. dollar payment system, is now live. Last month, Custodia started serving external business customers in select U.S. states, offering U.S. dollar deposits and government money market fund services, with bitcoin custody pending launch. The launch comes after overcoming regulatory pressures and challenges with the Federal Reserve Board.
Custodia Bank Debuts Services
Many crypto and narrow banking proponents have awaited the arrival of Custodia Bank, a financial institution that is tech-forward and customer-centric. “We’re grateful to our partners, who appreciate our approach of complying with banking laws and regulations; to Wyoming for its enabling laws; to our team and investors; and to the law-abiding digital asset industry,” said CEO Caitlin Long. Custodia says the bank’s regional bank-style risk management program, along with its dedication to following regulations, sets it apart from competitors.
Services now available include U.S. dollar deposits and U.S. government money market fund services, tailored to U.S.-based business customers. This includes digital asset businesses, fintechs, banks, corporate treasurers, trusts, pension funds, and start-ups. The bank’s strategy is to eventually serve customers worldwide, providing enhanced regulatory clarity and minimized transactional risk with its unique reserve model.
Custodia operates under the first special purpose depository institution (SPDI) legal and regulatory framework in the United States. This approach allows the bank to offer a full suite of financial services for both U.S. dollars and digital assets. Demand deposit accounts are protected under a 100% reserve requirement, and the bank offers API solutions for programmable accounts, payments, settlement, and future custody products, Custodia’s website discloses.
Custodia Bank’s journey to this point has been marked by challenges. In December, they informed the U.S. Federal Reserve of their intention to complete a specific task list and followed through despite it no longer being required. Independent reviews, new partnerships, and the development of new services to meet market needs were all part of the process, Custodia detailed on Friday.
In January 2023, the Federal Reserve Board issued a denial for Custodia’s application to become a member of the system, citing “significant safety and soundness risks” related to crypto assets and an insufficient risk management framework. The denial reflected broader regulatory skepticism towards digital assets and narrow banking techniques. However, Custodia’s perseverance and alignment with Wyoming’s innovative legal framework for SPDIs have allowed them to navigate these challenges and emerge as a regulated bank.
What do you think about Custodia Bank going live? Share your thoughts and opinions about this subject in the comments section below.
Custodia Bank Founder Caitlin Long: ‘The Fed Thinks Only Large Incumbents Should Service Crypto’
Caitlin Long, the founder of Custodia Bank, has railed against the favoritism that the Federal Reserve and the institutions of the U.S. financial system are supposedly showing to incumbents. According to Long, regulators have applied double standards when permitting established financial institutions to serve the crypto market and access instruments like Fed master accounts.
Custodia CEO Caitlin Long Accuses U.S. Federal Reserve of ‘Incumbent Bias’
Caitlin Long, founder and CEO of Custodia Bank, has stated that the U.S. Federal Reserve and other regulators are favoring incumbents when it comes to allowing them to offer cryptocurrency-based instruments in the U.S. market. In a recent interview, Long, who was part of the Wyoming Blockchain Select Committee, declared there is a “coordinated crackdown” on cryptocurrency banking service providers, with the involvement of the White House in the process.
She commented it was “interesting” that after regulatory action against established players in the crypto industry, large incumbents like Charles Schwab, Citadel Securities, and Fidelity Digital Assets announced the launch of EDX, a cryptocurrency exchange.
For Long, this indicates that state financial institutions such as the Fed are “picking and choosing” which companies and banks can get access to their services. On this, Long stated:
The Fed thinks only large incumbents should service crypto. Start-ups that comply with all Fed laws, rules & regulations are being kept out, while Fed lets large incumbents proceed.
Custodia’s Master Account Crusade
Long, who has criticized the treatment of crypto by the U.S. government before, has been at the center of a battle to get Custodia Bank admitted as a Federal Reserve member and to get access to a Federal Reserve Master Account. The startup was denied access to this instrument, which allows for direct banking with the Fed without facing counterparty risks from other commercial banks, due to its “proposed focus on crypto-assets” which “presented significant safety and soundness risks.”
However, Long has found that other institutions which did not qualify legally for having a Fed master account have been using one for some time, according to the recently released master account database.
Long explained:
I see institutions on the list of Fed master account holders that do not appear to be eligible (eg, state-chartered trust companies. So, Reserve Trust wasn’t alone). Under what authority did the Fed grant master accounts to ineligible institutions?
Custodia and the state of Wyoming are taking legal action against the Federal Reserve for not providing access to the central bank’s payments system.
What do you think about Caitlin Long’s stance on financial incumbents and crypto? Tell us in the comment section below.
A Look at the Fed’s Recent Custodia Bank Denial and the Central Bank’s Push Back Against Narrow Banking
Over the past century, the number of American banks has significantly decreased, dropping from 30,000 banks in 1921 to 4,997 U.S. banks in 2021, according to data from the Federal Reserve. Recently, the U.S. central bank denied Custodia Bank of Wyoming, a financial institution that holds .08 for every dollar deposited by customers. Although there appears to be a need for such a bank after the collapse of three major U.S. banks, the Federal Reserve stated that board members have “heightened concerns” about institutions with plans to focus solely on a narrow sector.
The Fed’s Explanation on Why it Denied Custodia Bank Highlights Adversity to Crypto-Asset Sector
Shortly before the collapse of Silvergate Bank, Silicon Valley Bank, and Signature Bank, the Cheyenne, Wyoming-based financial institution, Custodia Bank, was denied membership in the Federal Reserve System. The Federal Reserve Board specified that the application submitted by Custodia was “inconsistent with the factors required by law.” This week, the Fed published its explanation as to why it rejected the Wyoming bank. Custodia would be distinct from the numerous banks currently in operation, as it holds a complete reserve and more to cover deposits.
A statement from Custodia published on March 24 highlighted the need for a bank that operates in this manner, following the collapse of several banks. “Historic bank runs in the last two weeks underscore the dire need for fully solvent banks that are equipped to serve fast-changing industries in an era of rapidly improving technology,” the company stated. “That is the exact model proposed by Custodia Bank – to hold .08 in cash to back every dollar deposited by customers. Regrettably, the Federal Reserve did not pay enough attention and allowed bank run risks to accumulate at conventional banks.”
The Fed stated in its decision that it had “fundamental concerns” about Custodia’s application, including its “novel and unprecedented features.” One problem the Fed has with Custodia’s business model is its concentration on narrow banking and the provision of services to crypto clients. “In general, the board has heightened concerns about banks with business plans focused on a narrow sector of the economy,” the U.S. central bank’s board stated. “Those concerns are further heightened concerning Custodia because it is an uninsured depository institution intending to concentrate nearly solely on offering products and services connected to the crypto-asset sector, which raises greater concerns of illicit finance and safety and soundness risks.”
Could Narrow Banking Pose a Threat to the Current Fractional Reserve Model?
Narrow banking is a system that restricts lending activities to only safe, low-risk investments and maintains a 100% reserve requirement against these investments. It is sometimes called “100% reserve banking.” However, as Bitcoin.com News reported in another article on fractional reserve banking, narrow banking is not a widespread practice these days, especially among the 4,997 banks in the United States. The U.S. has not witnessed many narrow banking practices since the Suffolk System, a method developed by a group of New England-based banks in the early 19th century.
During the Suffolk System, member banks had to maintain 100% of their deposits in reserve with the Suffolk member banks, which issued a common currency that could be used by customers of any participating bank. Despite its success in stabilizing the New England banking system, the Suffolk System was eventually replaced by fractional reserve banking. The system is also believed to have functioned similarly to modern-day central banks, as one study indicates that the “private commercial bank also provided some services that today are provided by central banks.”
The International Monetary Fund (IMF) has published a paper on narrow banking, but the author of the report says that the “economic costs of narrow banking could be particularly significant in developing countries.” The IMF report also suggests that a core banking model would be a better alternative. The U.S. Federal Reserve has been pushing back against narrow banking for quite some time, even before the Custodia denial. An editorial published by klgates.com in 2019 detailed how “the Board of Governors of the Federal Reserve System recently took action aimed at maintaining the status quo.”
The article noted that on March 12, 2019, the U.S. central bank issued an advance notice of proposed rulemaking (ANPR) to Regulation D. The authors, Stanley Ragalevsky and Robert Tammero Jr., detailed that the Fed ANPR came around the same time the Federal Reserve Bank of New York won a lawsuit against the financial institution TNB USA. The “nonbank” TNB sued the Federal Reserve in 2012 over its application to become a narrow bank in 2010.
At the time, TNB claimed that the Federal Reserve’s delay was motivated by pressure from traditional banks that saw TNB’s narrow banking model as a competitive threat. TNB’s argument may just be the crux of the situation as the current modern banking model is entirely based on the fractional reserve model. At a time when banks are failing, a narrow bank or 100% reserve-based financial institution’s model could be very popular.
It could also encourage other banks to follow the trend, as outlier banks that copied member banks within the Suffolk System in the early 19th century benefited from the idea of full reserve banking. Counter-arguments against the Suffolk System suggest the bank was attempting to establish a monopoly. However, with the number of banks decreasing by 83.34% over the last 100 years from 30,000 to 4,997, one could argue that there’s a monopoly over free banking practices.
Meanwhile, Custodia says it is taking its issues with the U.S. central bank to court. “The recently released Fed order is the result of numerous procedural abnormalities, factual inaccuracies that the Fed refused to correct, and general bias against digital assets,” Custodia explained in a statement on Friday. “The recently released Fed order is the result of numerous procedural abnormalities, factual inaccuracies that the Fed refused to correct, and general bias against digital assets,” Custodia said. “Rather than choosing to work with a bank utilizing a low-risk, fully-reserved business model, the Fed instead demonstrated its shortsightedness and inability to adapt to changing markets.”
Custodia added:
Perhaps more attention to areas of real risk would have prevented the bank closures that Custodia was created to avoid. It is a shame that Custodia must turn to the courts to vindicate its rights and compel the Fed to comply with the law.
What are your thoughts on the Federal Reserve’s stance towards the crypto-asset sector and narrow banking methods? Share your opinions in the comments section below.
Custodia CEO Slams US Government Over Broad Crackdown, Lack of Regulatory Clarity in Crypto Industry
Caitlin Long, CEO of crypto bank Custodia, criticized the U.S. government for its handling of a massive crypto fraud that occurred months before the company’s collapse. She made her remarks in a blog post after disclosing evidence to law enforcement. Long’s post followed Custodia’s unsuccessful application to become a member of the Federal Reserve System, which was denied by the Federal Reserve Board.
CEO of Custodia Criticizes U.S. Government for ‘Shooting a Messenger Who Warned of Crypto Debacle’
Executives of digital currency and blockchain companies are displeased with the U.S. government’s crackdowns and lack of regulatory clarity. Brian Armstrong, CEO of Coinbase, has called on Congress to pass clear legislation on cryptocurrencies, and Jesse Powell, CEO of Kraken, has echoed that message. On Feb. 17, Caitlin Long, CEO of Custodia, published a blog post explaining that she had given evidence to authorities about a crypto fraud case months before the company collapsed, leaving its millions of customers with losses.
In her blog post titled “Shame on Washington, DC for Shooting a Messenger Who Warned of Crypto Debacle,” Long argues that the current enforcement actions are a misguided crackdown on the entire industry. “Calls for a crackdown today are coming from many of the same policymakers who were charmed by the fraudsters,” Long wrote. It is well known that senior members of the U.S. Securities and Exchange Commission (SEC), the White House, and the Commodity Futures Trading Commission (CFTC) met with Sam Bankman-Fried (SBF) and high-ranking FTX officials.
Additionally, an estimated one in three members of Congress received a direct contribution from SBF and his inner circle. “In a 180-degree turn, [policymakers are] now throwing the baby out with the bathwater,” Long wrote in her blog post. The Custodia CEO also mentioned that government officials likened her crypto bank’s operation to FTX’s misconduct and collapse, resulting in an ambush on the crypto industry by officials.
“Custodia Bank recently found itself in the crosshairs of Beltway Politics at their worst,” Long stressed. “Custodia was simultaneously attacked by the White House, the Federal Reserve Board of Governors, the Kansas City Fed, and Senator Dick Durbin (who conflated our non-leveraged, 100-percent liquid and solvent bank with FTX in a Senate floor speech, in which he attacked two companies run by female CEOs — Fidelity and Custodia — implicitly comparing us to a 29-year-old accused fraudster who is now wearing an ankle bracelet).”
The Custodia CEO added:
Custodia tried to become federally regulated – the very result bipartisan policymakers claim to want. Yet Custodia has been denied and [is] now disparaged for daring to come through the front door.
After Long published her blog post about the situation, Jesse Powell, CEO of Kraken, responded to her Twitter thread on the subject. “I can’t tell you how infuriating it is to have pointed out massive red flags and obviously illegal activity to regulators only to have them ignore the issues for years,” Powell tweeted. “‘They’re offshore. It’s complicated. We’re looking at everybody.’ FOR YEARS. Then to be used as their example.”
The complaints from Long, Armstrong, and Powell come after the SEC’s enforcement action against Terraform Labs and CEO Do Kwon, nine months after the entire Terra ecosystem collapsed. The U.S. securities regulator was criticized for being late to the game, and many believe the SEC is simply throwing spaghetti at the wall to see what will stick.
What is your opinion on the criticisms from Custodia’s CEO regarding the U.S. government’s handling of the recent enforcement actions in the crypto industry and the red flags she pointed out before a crypto company’s collapse? Share your thoughts on this topic in the comments section below.
Crypto Bank Custodia Denied Membership in US Federal Reserve System
The U.S. Federal Reserve Board has rejected the attempt of Custodia Bank to become member of the Federal Reserve System. According to the decision announced Friday, the application submitted by the digital asset bank is inconsistent with legal requirements.
Federal Reserve Board Says Business Model Proposed by Custodia Bank Presents Risks
Crypto bank Custodia has been denied membership in the United States Federal Reserve System. In an announcement dated Jan. 27, the Federal Reserve Board explained that the application, as submitted by the company, is “inconsistent with the required factors under the law.”
The press release further detailed that Custodia is a special purpose depository institution which does not have federal deposit insurance and wants to engage in “untested crypto activities,” including issuing a crypto asset. In that context, the Board argued:
The firm’s novel business model and proposed focus on crypto-assets presented significant safety and soundness risks.
The Federal Reserve Board reminded it had previously determined that “such crypto activities are highly likely to be inconsistent with safe and sound banking practices.” It also said the bank’s risk management framework, “including its ability to mitigate money laundering and terrorism financing risks,” was not sufficient to address relevant concerns.
“In light of these and other concerns, the firm’s application as submitted was inconsistent with the factors the Board is required to evaluate by law,” the body concluded in the statement, adding that the order will be released following a review for confidential information.
Membership in the Federal Reserve System would have given Custodia, a bank chartered by the state of Wyoming, certain benefits, in terms of taxation and investment, for example. In a tweeted statement, CEO Caitlin Long said the company was “surprised and disappointed” by the Board’s move, insisting:
Custodia offered a safe, federally-regulated, solvent alternative to the reckless speculators and grifters of crypto that penetrated the U.S. banking system, with disastrous results for some banks.
Long emphasized that Custodia actively sought federal regulation, “going above and beyond all requirements that apply to traditional banks.” She also noted that the denial is consistent with the concerns raised by the company about the Fed’s handling of its applications and vowed that the bank will continue to litigate the issue.
The executive was referring to a lawsuit filed by Custodia against the central bank system’s delayed ruling on its application for a master account. The latter remains pending, as the company pointed out on Twitter. Banks hold most of their reserves in master accounts at the Fed which allows them to make transfers between each other and settle payments.
Also on Friday, the Federal Reserve Board issued a policy statement, according to which both insured and uninsured banking institutions will be subjected to limits on certain activities, including those associated with crypto assets.
Do you think the U.S. Federal Reserve Board will change its stance in the future regarding applications like the one filed by Custodia Bank? Share your expectations in the comments section below.