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Wyoming crypto bank not backing down in fight to access Federal Reserve

Custodia Bank, a Wyoming cryptocurrency bank locked in a legal battle with the Federal Reserve for nearly two years, appeals a district judge’s decision to deny it access to the Fed’s banking facilities. FOX Business reported that they are considering it.

Custodia, one of Wyoming’s four crypto banks, told FOX Business it believes the judge’s decision was wrong and is considering all options, including an appeal.

A spokesperson for Custodea told FOX Business: “If this decision stands, only large, leveraged New York banks at the heart of the financial system will be allowed to bank into the crypto industry through Bitcoin ETFs. It will happen,” he said. “And they are doing this without the risk management protections that Wyoming banks have proposed.”

Custodea’s victory marks a $2 trillion investment that had been largely shunned by Wall Street and the traditional banking system as being considered too fringe until the Securities and Exchange Commission approved 11 Bitcoin ETFs in January. This was supposed to be a groundbreaking achievement for the scale of the cryptocurrency industry. And the industry is distrusted by the federal government.

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Of course, there is no guarantee that Custodia will succeed on appeal. Legal experts who have been following the case believe the bank may actually have a credible cause to appeal, based on what they call Judge Scott Skavdahl’s mysterious change of heart.

“The judge’s decision is completely wrong,” former Pennsylvania Sen. Pat Toomey told FOX Business. “This contradicts and contradicts his June decision denying the Fed’s request to dismiss the case. There is absolutely no logic here. Mr. Custodia’s decision to appeal I hope so.”

Pat Toomey was known for his pro-cryptocurrency policies during his time as a senator, and retired from the Senate in January 2023. (Tassos Katopodis/Getty Images/Getty Images)

Mr. Toomey was known for his crypto-promoting policies during his time in the Senate, but he retired from the Senate in January 2023 and currently serves on the Global Advisory Council of the cryptocurrency exchange Coinbase and the director of the cryptocurrency investment company Paradigm. is in charge of

He also joined Sen. Cynthia Lummis of Wyoming, Rep. Kevin Cramer of North Dakota, and Rep. Warren Davidson of Ohio in filing a court brief supporting Custodial in seeking access to the Fed. He was also one of the few Republicans to write the book. banking services. The brief asserted that Congress intended all banks to have equal access to the Fed’s payments system on a nondiscriminatory basis.

Lummis expressed disappointment in the judge’s ruling in a post about X on Friday.

“Wyoming SPDI has the right to access the master account,” she wrote. “It is past time for the Fed to follow the laws passed by Congress.”

Cynthia Lumis

Sen. Cynthia Lummis (R-Wyo.) speaks at the Bitcoin 2021 conference in Miami, Florida on June 4, 2021. (Eva Marie Uzcategui/Bloomberg via Getty Images/Getty Images)

An SPDI (Special Purpose Depository Institution) is a bank that is permitted to store cryptocurrencies under Wyoming law if it holds reserves that back 100% of the digital assets on deposit. The Wyoming Department of Banking has approved four SPDIs in 2020-2021, none of which have been approved by the Federal Reserve.

Other prominent figures in the crypto industry are also calling on Custodia to appeal what they see as the latest attacks on the industry.

Anthony Scaramucci, founder of SkyBridge Capital, told FOX Business: “This is yet another blatant example of a hostile attack on cryptocurrencies by deep-rooted special interests represented by Elizabeth Warren. ” he said.

Warren, a senior senator from Massachusetts and an influential progressive voice in Washington, has criticized the cryptocurrency industry for its links to money laundering and other wrongdoing. We have lobbied strongly against giving them access to the system. The Federal Reserve is wary of cryptocurrencies because they can increase systemic risk in a leveraged financial system.

senator elizabeth warren

Sen. Elizabeth Warren (D-Mass.) speaks during a Senate Banking Committee hearing at the Capitol on June 13, 2023 in Washington, DC. (Michael A. McCoy/Getty Images/Getty Images)

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Custodia, which operates an unleveraged business model, announced that it would be closing with the Federal Reserve Bank of Kansas City in June 2022 after the bank took months to decide whether to issue a so-called master to Custodia. A lawsuit was filed against the central bank board. This gives national banks a deposit account with the Fed instead of going through an intermediary bank.

The approval process typically takes five to seven days, according to the application form on the Fed’s website. In Custodia’s case, it spanned over two years.

After FTX, a cryptocurrency exchange run by convicted fraudster Sam Bankman Fried, collapsed in November, the Kansas City Fed finally filed a lawsuit regarding Custodea’s management, financial condition, and Wyoming’s capabilities. Custodial’s application was rejected in January 2023, citing uncertainty. Effectively regulate banks that store virtual currencies.

Sam Bankman Fried

Former FTX CEO Sam Bankman Fried appears at a bail hearing in Manhattan Federal Court in New York City on August 11, 2023. (Michael M. Santiago/Getty Images/Getty Images)

Unfortunately for the many honest crypto companies that still want access to the U.S. banking system, the collapse of FTX caused a domino effect just four months later, with Silicon Valley Bank, Silver Gate Bank, and Signature Bank Several crypto-related companies and traditional institutions have gone bankrupt. Due to tight liquidity.

As a result, domestic banks have become more cautious than ever when conducting transactions with companies that handle virtual currencies.

Custodea’s unique business model, which proposes holding more reserves than the amount of customers’ deposits to reduce liquidity risk, helped convince the Fed to look beyond potential liabilities. I believed it would be helpful.

That was a mistake.

Custodea cited its rejection of the application as a link to cryptocurrencies, which have now come to the government’s attention as a fraudulent industry thanks to Bankman Freed’s antics, blocking access to the central banking system. It was perceived as a politically motivated attempt.

Custodia amended its lawsuit following the denial, saying it believed the Fed’s board in Washington may have illegally interfered with the Kansas City branch to influence decisions. To support this claim, Mr. Custodia cited his active engagement with Kansas City Fed officials prior to the denial, pointing to what he viewed as a questionable reversal in the denial decision.

The Fed argued that Congress has complete discretion to approve or reject depository institutions, regardless of eligibility.

In suing the Fed, Custodia laid out the rationale that an independent judge held that the central bank’s actions were the result of a hostile federal government intent on cutting the crypto industry out of the lifeblood of the federal payments system. I was hoping that you would understand. He also hoped it would help other state-chartered banks be on a level playing field with federal agencies in terms of access to the Fed.

federal reserve

Federal Reserve Building in Washington DC (license/image)

This is not the first time the Fed has said no to national banks’ requests to open master accounts. Since 2015, the Fed has refused to join 33 uninsured state charters, and critics say the central bank is not turning itself into a quasi-loquacious figure and giving itself too much power. I’m worried about that.

This also isn’t the first time the Fed has faced lawsuits that have seemingly arbitrarily cut banks off because of customers trading in non-federally authorized businesses.

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Colorado-based Fourth Corner sued the Kansas City Fed in 2015 for denying it access to its master account because of its affiliation with a marijuana-related company. After continued rejections from the Feds, the company said it would only accommodate ancillary marijuana businesses and organizations and not businesses that directly handle marijuana substances. Based on these conditions, the Fed said it would “conditionally grant” a master account to the bank.

Mr. Toomey and many others who have been following the case believe there is a positive outcome for Mr. Custodia, based on Mr. Skavdahl’s June 8 denial of Mr. Skavdahl’s motion to dismiss the Fed’s case. was reasonably confident that it would be obtained.

He began by criticizing the Fed for taking “longer than an elephant’s gestation period” to process Mr. Custodia’s application. He also said that the rules Congress has established for the Fed cannot be construed to give financial institutions carte blanche authority to approve or deny master account applications, and that the rules Congress has set for the Fed cannot be construed to give financial institutions carte blanche authority to approve or deny master account applications. It threw cold water on the Fed’s claim that it has complete discretion to approve or disapprove. fit.

Skavdahl also denied the Fed’s request to throw out the case, saying Custodia said the Fed’s board may have intervened in denying Custodia’s application and may have violated the Administrative Procedure Act. It ruled that it had made a plausible case. He also reasonably argues that Mr. Custodia may be eligible for relief under the Mandamus Act, which would effectively force the Fed to provide a master account. He said it would be.

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That’s why Friday’s decision that the Fed has no legal obligation to provide master accounts to eligible institutions and that Custody’s lawyers could not prove that the board influenced the Kansas City Fed’s decision to deny the account. It was a shock to many. This includes Custodia executives and experts who were involved in the incident.

“This is completely contradictory and contradictory to what he has said previously,” Toomey said, “and the fact that he has not given any explanation makes it important in any appeal.” I believe and hope that this will be a positive factor.”

Toomey told FOX Business he doesn’t know what caused the judge to change his mind, but believes it was a byproduct of the federal government’s capricious opposition to the digital asset industry.

“Custodial should have been given FDIC insurance, but the FDIC is politicized and has arbitrarily chosen to disadvantage the entire sector, which is what led us down this path. “This is the cause,” he said.

FDIC logo

March 17, 2023 Federal Deposit Insurance Corporation (FDIC) Bill. (Celal Gunes/Anadolu Agency via Getty Images / Getty Images)

In January 2023, the same month that the Kansas City Fed rejected Custodea’s master account application, the Fed’s Board of Governors, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued a warning to member banks about the risks associated with virtual currencies. uttered. This highlighted liquidity headwinds that could negatively impact balance sheets.

One of the Fed’s arguments in denying Custodia’s application is that Custodia is not insured by the FDIC, despite Custodia’s attempts to seek insurance in the past. However, as Mr. Toomey noted, the FDIC does not insure crypto-related businesses.

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The Fed’s database lists more than 500 master account holders who are not federally insured, as well as companies legally prohibited from accepting deposits, including Fidelity Management Trust Company and Raymond James Trust Company. A small number of trust companies are also listed. The Texas Comptroller of Public Accounts also has a master Fed account.

Custodea’s lawyers raised this point in their summary judgment brief, asking why the Fed is allowing access to the chief tax collector in Texas and some nonbanks, while Custodea is headquartered in Connecticut. He questioned whether the bank is denying access to eligible depository institutions such as Narrow Bank and Pay Services in California.

The Fed did not respond to requests for comment.

The timeline for Custodia’s appeal is unclear, but the bank appears determined not to go down without a fight.

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