Wyoming defends the “legitimacy” of its crypto charter framework in the Custodia lawsuit

The state of Wyoming is taking issue with the Federal Reserve Board’s insinuations that its regulatory framework for special purpose depository institutions (SPDIs) — state-authorized banks that can handle digital assets — is not up to snuff.

Wyoming Attorney General Bridget Hill filed a lawsuit in the U.S. District Court of Wyoming asking permission to intervene in Custodia Bank’s lawsuit against the Federal Reserve Board and the Kansas City Fed for delaying and ultimately denying the crypto-friendly bank’s application for a main account and membership with the Fed.

Although the Wyoming-based bank’s applications were rejected in January, 18 months after the application was submitted, the Federal Reserve Board only released its reasons for the rejection in an 86-page report last month. The report condemned Custodia’s proposed business plan in every single category the Fed considers, arguing that its decision not to federally insure deposits and its reliance on a live 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, with $1.08 in cash for every dollar deposited by customers , suggesting that the real reason for rejection. is a Fed conspiracy to cut crypto from the banking system.

But the fight between Custodia and the Fed isn’t just about crypto — it’s also about the dual banking system in the US, which allows banks to charter under either federal or state law.

Custodia was granted an SPDI charter by the state of Wyoming in October 2020. But, the motion argues, the Fed didn’t see it as good enough to grant Custodia membership.

“The Custodia master account summary analysis that the Kansas City Fed provided to Custodia makes clear that their view of perceived deficiencies in Wyoming’s laws and regulations for SPDI is partially responsible for its rejection,” the report said.

Hill argued that while Wyoming did not rule 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 decision against Custodia based on Custodia’s application and unique situation may not be prejudicial to the state, the defendants’ apparent determination that Wyoming’s SPDI statutes and regulations, and the SPDI banks themselves, lacks will,” argued Hill’s report.

The report points out the bias of the Fed’s skepticism about new state-chartered banks, such as Custodia’s, involvement in the digital asset 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 SPDI has to intent to engage in.”