According to the claims made by the state’s attorney general, the Kansas City Fed’s decision not to give Custodia Bank master account is based on the “possible deficiencies in Wyoming’s regulations and laws”
Wyoming has been taking offense about the Federal Reserve Board’s hints that the regulatory crypto framework regarding the SPDI (special purpose depository institutions) is not up to the mark.
The Attorney General for the state, Bridget Hill, filed a motion in the U.S. District Court requesting to grant permission for interfering in the lawsuit against the Custodia Bank against the Kansas City Fed and the Federal Reserve Board.
The motion is filed for postponing and then denying the application from this crypto-friendly banking regarding the master account and the Fed’s membership.
Federal Reserve Board Issues a Report for Its Denial
While the bank’s application was denied in January, which was around one and a half years later after filing the first application, the Federal Reserve Board just recently made a report public regarding the denial of the bank’s application.
The eviscerating 86-page report from the Federal Reserve Board mentions the reasons for denying the Wyoming-based bank’s applications. In the report, the Fed condemned the proposal for the business plan in each category that the Fed evaluates.
It also claimed that the decision to not insure the deposits on a federal level and the reliance of the bank on the highly volatile and vibrant crypto market made it risky for itself and its clients.
The report also highlights the preconception of the Fed’s suspicion regarding new state-chartered banks, such as Custodia, and their role in online assets.
Custodia CEO Vocal about the Pushback
Caitlin Long, Custodia Bank’s CEO, had played a major role in drafting the state’s regulations and laws for the crypto market. She has been a critic of the decision, saying that the bank is proposing in holding $1.08 in cash for each dollar the customer deposits.
She adds that the primary reason for denying the application is a Fed ruse to eliminate crypto from the banking system. However, the battle between Fed and Custodia is not only about the crypto market — it is about the dual banking system.
The dual banking system in the U.S. allows the banks to either come under federal or state law. The state of Wyoming gave the bank an SPDI charter in October 2020. However, the motion argues that the Fed didn’t see anything worthy enough to give the Custodia Bank a membership.
In its report, the Fed mentioned that “the Kansas City Fed gave the analysis of the Custodia Bank’s master account summary which show that there are possible deficiencies in Wyoming’s regulations and laws for SPDIs which is the reason behind its denial for the application.”
Hill contended that despite Wyoming’s neutral stance on Custodia’s eligibility for a master account, the state must step in to preserve “the validity and sustainability of the State’s statutory and legal framework for the crypto market.”
Growing Calls for Legislation by the Investors and Lawmakers Globally
The crypto market has been known for its highly volatile nature. While it does provides investors with a wide range of opportunities, it has also led to huge losses for the investors. As a result, many of them are now demanding tighter regulations for the crypto market.
This has also led to an intense crackdown by the US regulatory authorities and other departments on the crypto market. Even countries like Japan, Malaysia, etc., and the members of the European Union and others are now working on bringing a more comprehensive set of regulations.