In the Order, the Fed expressed concerns with the “novel and unprecedented features” of Custodia’s proposal – concerns that were elevated by the facts that Custodia’s business plan focused on a narrow sector of the economy, and because Custodia is an uninsured depository institution. In particular, Custodia sought “to issue, redeem, and transfer Avits-dollar-denominated tokens that Custodia describes as programmable ‘electronic negotiable instrument’ and as deposits for purposes of federal banking law.” According to the Order, “hile Custodia does not refer to Avits as ‘stablecoins,’ the tokens would likely function similar to ‘stablecoins’ like Tether and USDC.” The Order likened the services which Custodia sought to provide as similar to many of the services offered by crypto-asset exchanges. This lack of federal deposit insurance was a key concern for the Fed.Ĭustodia sought to offer deposit accounts for businesses and eventually high-net worth individuals and provide such customers access to ACH and wire transactions, and online banking services. Wyoming does not require SPDIs to obtain federal deposit insurance, and Custodia was not seeking to obtain such insurance. dollar payment system and the crypto-asset ecosystem.” Under the Wyoming SPDI Act, Custodia may engage in a nonlending banking business, provide payment services for depositors, and, with the approval of the state banking commissioner, engage in any other activity that is usual or incidental to the business of banking. The OrderĪccording to the Order, “Custodia intends to focus its business model almost entirely on the crypto-asset sector, and has described itself as seeking to become a ‘a compliant bridge’ between the U.S. Treasury regarding perceived AML and sanctions vulnerabilities in decentralized finance providers. This same issue was also noted by the recent report by the U.S. sanctions law due to limitations inherent in crypto transactions relating to knowing with confidence who is actually conducting the transactions. Likewise, the Fed has expressed its skepticism in the Order that blockchain analytics services, even when applied skillfully and with the best of intentions, actually can satisfy the BSA and U.S. The 86-page Order is very detailed, and often also discusses safety and soundness concerns, as well as other issues.Īs we discuss, the Order suggests that any bank will have a hard time convincing the Fed that crypto-heavy banking services can comply with the requirements of the Bank Secrecy Act (“BSA”) and U.S. We focus here on the Order because of its much broader anti-money laundering (“AML”) and sanctions implications for any banks which are contemplating targeted services for the digital asset industry. According to Wyoming, the Fed’s decision to deny Custodia’s application has the effect of preventing Custodia and other Wyoming SPDIs from ever being able to attain the status of federal regulation. This blog post focuses on an important issue referenced seemingly in passing in Wyoming’s request for permission to intervene, which is clearly motivating in part the filing by Wyoming: on March 24, 2023, the Fed made public its JanuOrder Denying Application for Membership (the “Order”) by Custodia, which had requested the Fed’s approval under Section 9 of the Federal Reserve Act to become a member of the Federal Reserve System. More specifically, Wyoming accuses the defendants of seeking to treat Wyoming SPDIs in an inequitable manner, thereby “treating state-chartered non-federally regulated banks as second-class banks ineligible to compete with federally-regulated ones.” In a nutshell, Wyoming’s request to intervene critiques the defendants because of their “view of perceived inadequacies in Wyoming’s laws and regulations for SPDIs, partially responsible” for the denial of Custodia’s master account application. Having a Fed master account is therefore critical to any institution looking to operate in the U.S. Generalizing greatly, having a master account allows financial institutions to operate in the normal course as a custodial bank in the U.S. This dispute involves a complaint ( now amended) filed by Custodia – a state-chartered special purpose depository institution (“SPDI”) based in Cheyenne, Wyoming – against the Fed and the Federal Reserve Bank of Kansas City, alleging that the defendants improperly denied Custodia’s application for a “master account” with the Fed. (“Custodia”) and the Board of Governors of the Federal Reserve System (“the Fed”) and the Federal Reserve Bank of Kansas City. On April 13, the State of Wyoming took the extraordinary step of filing a request for permission to intervene in the ongoing dispute between Custodia Bank, Inc.
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