Binance USD Suspension and Custodia Rejection Raise Concerns Over Future of Crypto Banking

Two weeks ago, Caitlin Long-founded Custodia Bank (formerly Avanti Bank), which is not yet operational, learned that the US Federal Reserve Board had rejected its application for membership, which would have formalized an association with the general reputation of the US the central bank. bank.

Now we can reveal the public rebellion.

It makes sense in a way: Binance is one of the most recognizable brands in crypto, lawsuits against banks are big and flashy (especially when connected to FTX) and Juno offers FDIC-protected checking accounts.

Binance has had many run-ins with US regulators, so are we really surprised that it is struggling with a US banking relationship? The Signature lawsuit is just a lawsuit, and Matt Damon, Stephen Curry, and Tom Brady know a lot of people who have been sued in crypto, don’t they? And Juno is a crypto bank that offers interest on its FDIC insured accounts, so is it shocking that something hurt its operational flow given how bad 2022 was?

No, not really. Where this gets surprising is when you add Custodia. The news of the rejection by the Federal Reserve Board was more worthy of a reaction than all of these other stories combined.

At the risk of sounding like Adam Neumann, Custodia is trying to make banking different. The goal of Custodia (when it finally launches) is to act as a compatible bridge between digital assets and the US dollar payment system. With that in mind, consider the Federal Reserve’s following statement in defense of the denial of Custodia’s application:

OK – that seems a bit reasonable.

The “previously made clear” is a reference to a joint multi-agency statement from Jan. 3 that cited crypto’s many risks to the banking system, including fraud, scams and inaccurate disclosures by crypto companies. The statement also cited other things, including legal uncertainty related to custody practices, market volatility, stablecoin run risk, contagion risk, and — my personal favorite — “risk to open, public and/or decentralized networks or similar systems.”

Where it becomes unreasonable is when you consider Custodia’s stated strategy and mission and this sentence from the Fed’s rejection:

But reducing or controlling that risk is exactly what Custodia is trying to do. Custodia is a Wyoming-chartered Special Purpose Depository Institution (SPDI), meaning it is a bank primarily engaged in the custody of assets, with a primary focus on keeping assets safe and settling transactions efficiently. Critically because of this designation as an SPDI, Custodia will be required to maintain unencumbered liquid assets (eg cash, US Treasury bonds) valued at 100% or more of its deposits. For every dollar of customer deposits, Custodia will have at least one dollar in reserve.

Although it sounds terrible, it is not. The reason most banks need FDIC insurance is because they are not required to keep a dollar in reserve for every dollar of deposits. Almost all banks, certainly the largest, practice fractional reserve banking where only a fraction of bank deposits are required to be available at any time for customer withdrawals. If that sounds scary, that’s because it kind of is. As we’ve learned, at our peril, everything works very well until it doesn’t.

Guess what? You can’t have a bank run if the assets are there. It really is that simple.

Without Custodia in this mix of banking-related crypto news, I’m not sure this part of the news cycle would have anything worth paying close attention to for long. Much crypto is based on trading, gambling and “numbers-go-up technology” that run afoul of nebulous financial securities laws – so the scare surrounding Binance, Signature and Juno doesn’t raise eyebrows on its own.

Skitishness around a fully reserved bank that just so happens to serve crypto businesses does.

This is not an advertisement for Custodia. It’s not even an advertisement for full-reserve banking requirements. Like bitcoins, I probably won’t get close to ad banks at all.

But I advocate more common sense regulation. Why is this conversation necessary? Crypto is not illegal, so a fully-reserved, chartered bank that wants to provide financial services to crypto companies should not be blocked from doing so.

Unless, of course, there is something else going on at the Federal Reserve or other agencies that makes them dirty to see, hear or read the word “crypto.”