Kryptobank steps up battle with Kansas City Fed

A crypto bank has been waiting a very long time for a stamp of approval from the Kansas City Fed — so long, in fact, that the nation’s oldest traditional the bank picked up crypto at the time.

Why it matters: It’s the latest chapter in the old story of the frictions emerging between new players and incumbents in the race to embrace new technology.

• The new technology in this case is bitcoin and ether, and the actors involved are banks that want to hold those assets – including keys and wallets.

The big picture: Crypto wants to upgrade the traditional banking system, but it can’t do it without scaling.

• And it cannot scale (attract large, wealthy investors) without integrating into existing financial payment systems. So while crypto banks are on ice, incumbent banks are moving in.
• In fact, this is the budding stage that will determine whether crypto banks will emerge as meaningful players in the next cycle, or die on the vine in favor of the big banks that want in.

Zoom in: Custodia Bank, a Wyoming-chartered digital asset bank, wants to operate like many traditional banks do, with a “main account.”

• Having one allows firms to store funds with the Fed and unlocks direct access to payment rails that allow banks to transfer money to each other, rather than going through an intermediary.

In-game status: The Kansas City Fed has yet to make a decision on Custodia’s application anyway. Custodia filed a lawsuit against the Fed in June over the delay.

The intrigue: Earlier this week, America’s oldest bank BNY Mellon — a bank whose founders include Alexander Hamilton — said it will launch custody services for bitcoin and ether.

• In response, Custodia CEO Caitlin Long delivered withering remarks during a fintech conference about the Federal Reserve’s different stance on crypto for new and old banks.

What she says: “I’m about to make some news,” Long said in DC earlier this week. “You’ll see a filing from my company in that lawsuit regarding the announcement this morning,” a reference to BNY Mellon’s entry into crypto custody services.

• “See what the Fed actually said last week versus what it did today.”

What they say: In a filing last week, the Fed said, “In sum, Custodia’s request raises technical, complex and novel issues that pose a risk to [the Federal Reserve Bank of Kansas City] which potentially has implications for the stability of our country’s payment system.”

• The Kansas City Fed declined comment.

Meanwhile, Custodia asks why the process for reviewing master account applications is a “black box” and takes so long, given the application forms state that “processing can take 5-7 working days”.

• The lengthy process “continues to cause serious, irreparable harm to Custodia,” the bank’s suit says.

The bottom line: Long noted the “favoritism” on display in BNY Mellon’s news, arguing that the delay in Custodia’s main account application “hurts the incumbent financial institutions whose interests are represented on the board of the Kansas City Fed,” according to Custodia’s Wednesday afternoon filing.