Bitcoin Bank Custodia Sues Federal Reserve, Demanding Master Account Decision

Bitcoin Custodia bank today sued the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City, accusing it of “illegally” delaying for 19 months acting on its request for a Federal Reserve master account.

The Wyoming-founded bank under a cryptocurrency-friendly statute passed in 2019 allowing “special purpose depository institutions”, says the main account would reduce its costs and is “vital” to its core mission of providing a bridge between digital assets and the US dollar system.

According to the lawsuit, the Federal Reserve has a legal obligation to act within a year and states in its own paperwork that it typically takes only five to seven days to act on a master account application. Custodia’s lawsuit alleges that the Kansas City Fed’s order processing was moving forward until spring 2021, when the main Federal Reserve got involved. The lawsuit aims to force the Federal Reserve and the Kansas City branch to act on its request – and ultimately to approve it.

If Custodia wins its case or receives a master account, it would be the first bitcoin bank to win one. As central banks around the world look to merge the best innovation that bitcoin and other blockchain-based currencies offer, with the best of central management, the process – and the Fed’s reaction to it – could help define the future. of the banks.

“Through this lawsuit, Custodia seeks to ensure that your Federal Reserve Master Account application receives the fair dealing and due process guaranteed by both the Federal statute and the U.S. Constitution,” said Custodia Bank spokesman Nathan Miller. , in a statement. all rules applicable to it, and went further by becoming a member bank of the Fed.”

Custodia Bank was founded by Morgan Stanley veteran Caitlin Long in 2020 under the name Avanti Financial Group. Unlike traditional banks that generate most of their income from loans, Custodia was incorporated into Wyoming state regulations Long helped to write that it would require this new type of bank to retain custody of the cryptocurrency it holds. In March 2021, it raised $37 million Series A from investors including Binance.US, Coinbase Ventures, Morgan Creek Digital, Slow Ventures and Susquehanna, bringing the total raised to $44 million.

Long has become a detractor of so-called re-hypothesizing, when banks lend money to others who lend that money to others after the Great Recession, when a similar practice with subprime mortgages led to multiple ownership claims over the same assets and clouded lending. bad. among larger loan groups. She was concerned that similar behavior in cryptocurrencies could undermine the value derived from bitcoin’s 21 million coin cap.

An early advocate of bitcoin Long became one of the first traditional bankers to make blockchain her career in 2016, when she left her position as managing director at Morgan Stanley to join New York-based Symbiont, an enterprise blockchain startup founded by fellow early adopters of bitcoin who wanted to capture the best of distributed ledger technology like blockchain, but in a way that respected privacy regulations and high volumes served by large companies.

After helping integrate $7 trillion asset manager Vanguard among Symbiont’s first clients, Long branched out on his own to create financial products directly leveraging bitcoin. To combat the proliferation of remortgaged bitcoin, Long established Custodia to provide accounts for cryptocurrency companies that would help them pay their employees and taxes, but generate revenue by charging fees for services other than loans.

To do that, your bank would need a master account with the Fed, like all federally-accredited banks, which would essentially turn them into a hotline with the regulator. According to the statement, this was crucial to the bank’s business model, as it would allow it to “dramatically reduce its costs and bring new products and options to users of financial services.”

“This delay in processing Custodia’s master account application is resulting in substantial and ongoing damages to Custodia,” according to the lawsuit. “The immediate harm is that the delay forced Custodia to postpone its individual entry into the financial services market in favor of a decidedly second-best and much more expensive alternative: launching with a correspondent bank – which has a master account – while Custodia awaits a decision on its long-pending application.”

The order further states that the Kansas City Fed received Custodia’s business plan in May 2020 and confirmed that Custodia’s master account order submitted in late October 2020 was complete. In early 2021, a Kansas City Fed representative informed Custodia that there were “no impediments” with the application, according to the filing.

Custodia’s 44-page lawsuit lists eight relief requests, or ways the Fed could resolve the case. The first allegation raises a broader question about the functioning of individual Federal Reserve banks and whether they are subject to rules for federal agencies, including the Administrative Procedure Act and due process requirements. The lawsuit says that if the Kansas City Federal Reserve is considered a private entity (its board is comprised of a majority of the private sector, employees not appointed by the president), it also cannot make final decisions about issuing master accounts without review. by the Federal Reserve Board, or when exercising government powers, is subject to the highest level of scrutiny provided to government actors.

The Kansas City branch of the Federal Reserve declined to comment on the lawsuit.

Initially slow to act on the innovations underlying bitcoin, which allow value to move without central authorities, the Federal Reserve has largely allowed other countries to take the lead in incorporating lessons learned. In 2020, China began public trials of its own central bank digital currency, and the Fed itself has expressed interest in letting the private sector innovate in the form of so-called stablecoins that are backed by assets like the US dollar but created by private companies. In 2020, Long revealed her own plans for what would amount to a stablecoin, but since she was planning a Fed account, it would be similar to a digital check, which could result in a regulated digital dollar.

In May, a stablecoin backed in part by bitcoin, a cryptocurrency called Luna, and stabilized using a supply-controlling algorithm called TerraUSD, collapsed, wiping out $60 billion in value and prompting calls for more space regulation. The bipartisan regulation proposed this morning by US Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) would address some of the concerns in the process if implemented. Among a series of sweeping requirements, the Responsible Financial Innovation Act would require the Fed to issue routing numbers to depository institutions, prohibit federal banking agencies from delaying orders under existing law, and require them to rule on all orders within a year.

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