The state of Wyoming is taking umbrage at the Federal Reserve Board’s insinuations that its regulatory framework for special purpose depository institutions (SPDI) – state-chartered banks that can handle digital assets – are not up to snuff.
Wyoming Attorney General Bridget Hill filed a motion with the U.S. District Court in Wyoming asking for permission to intervene in Custodia Bank’s lawsuit against the Federal Reserve Board and the Kansas City Fed (whose jurisdiction includes Wyoming) for delaying and ultimately denying the crypto-friendly bank’s application for a master account and membership with the Fed.
Though the Wyoming-based bank’s applications were denied in January, 18 months after the application was first filed, the Federal Reserve Board only made public its reasoning for the denial in an eviscerating 86-page report last month. The report condemned Custodia’s proposed business plan in every single category the Fed assesses, and claimed the decision not to federally insure deposits and Custodia’s dependence on a vibrant crypto market made it a danger to itself and its customers.
Custodia CEO Caitlin Long, who helped draft Wyoming’s crypto laws, has been vocal in her pushback against the Fed’s decision, citing Custodia’s proposal to be fully capitalized, holding $1.08 in cash for every dollar deposited by customers, and suggesting the real reason for denial is a Fed conspiracy to cut crypto off from the banking system.
But the battle between Custodia and the Fed is not just about crypto – it’s also about the dual banking system in the U.S., which allows banks to charter under either federal or state law.
Custodia was granted a SPDI charter from the state of Wyoming in October 2020. But, the motion argues, the Fed didn’t see that as good enough to grant Custodia membership.
“The Custodia Master Account Summary Analysis the Kansas City Fed provided Custodia makes it clear that its view of perceived inadequacies in Wyoming’s laws and regulations for SPDIs is partially responsible for its denial,” the report said.
Hill argued that, though Wyoming wasn’t taking a position on whether or not Custodia was entitled to a master account, it is necessary for the state to intervene to defend “the legitimacy and viability of the State’s statutory framework.”
“Although an adverse determination against Custodia on the merits of Custodia’s application and unique situation may not prejudice the State, the Defendants’ apparent determination that Wyoming’s SPDI statutes and regulations, and SPDI banks themselves, are deficient will,” Hill’s report argued.
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The report points out the prejudice of the Fed’s skepticism about new state-chartered banks, like Custodia, and their involvement in the digital assets space while allowing “old” state-chartered banks, such as New York-based BNY Mellon, “to engage in substantially the same digital asset custody activity Wyoming SPDIs intend to engage in.”