Custodia Bank accuses Fed of favoritism with BNY Mellon crypto launch

The Federal Reserve’s granting of BNY Mellon the ability to take custody of clients’ crypto assets is an example of the regulator showing favoritism toward an incumbent financial institution, digital asset bank Custodia Bank said in a lawsuit it filed Wednesday.

It was announced by BNY Mellon this week it was to begin receiving clients’ cryptocurrencies, the culmination of an initiative the bank rolled out February 2021 to develop a multi-asset digital custody and management platform to hold, transfer and issue crypto on behalf of asset management clients.

The move positions BNY Mellon as the first US-based systemically important financial institution (SIFI) to store digital currencies and allow clients to use one custody platform for traditional and crypto holdings, the bank said.

Kryptobank Custodia, which has been waiting 2½ years for a Fed main account, sued the Federal Reserve in June over what it claims is an “unlawful delay” in processing the application.

The Fed’s own standard agreement states that the process should take five to seven business days, the Wyoming-based bank claims in the complaint.

BNY Mellon’s announcement on Tuesday spurred Custodia to file a supplemental case, urging the court to take notice of the development, claiming it “exactly matches the allegations of favoritism” Custodia raised over the summer.

While participating as a panelist at DC Fintech Week, Custodia Bank CEO Caitlin Long addressed BNY Mellon’s crypto announcement and accused the Fed of hypocrisy.

“You’ll see a filing from my company in that lawsuit related to this morning’s announcement because the Federal Reserve filed filings last week that talked about the risk to the financial system from crypto, and today a bank holding company overseen by the Federal Reserve is entering crypto,” Long said. “We’ve been waiting two and a half years to do that.”

Custodia, formerly known as Avanti, was granted a Special Purpose Depository Institute (SPDI) license in Wyoming in 2020, and is seeking access to the Federal Reserve’s banking system for clearing US dollar transactions without having to use an intermediary bank.

The bank said access to a main account is critical to its ability to operate efficiently.

Refers to a report that the Fed released last month, in which it warned of the risks and challenges digital assets pose to the financial system, Long said BNY Mellon’s crypto announcement highlighted the regulator’s lack of consistency.

“Look at what the Fed actually said last week versus what it did today,” Long said.

In its lawsuit, Custodia said BNY Mellon’s announcement directly refutes the Fed’s argument that “permitting banks with main accounts to provide custody services for digital assets poses systemic risks that warrant further evaluation, thereby justifying indefinite delay.”

The move is an example of the Federal Reserve “picking winners and losers” tweeted Tyler Lindholmstate policy director for Sen. Cynthia Lummis, R-WY, whose office is spearheading legislation that would create a regulatory framework for digital assets.

“They ‘picked’ the oldest bank in the US for custody, but have blocked fintech startup banks in Wyoming,” said Lindholm, a former co-chair of the Wyoming Blockchain Task Force.