Wyoming defends crypto-friendly bank charter regime in Custodia Bank’s lawsuit with Fed
The US state of Wyoming has asked to intervene in the case between Custodia Bank and the Federal Reserve System, seeking to defend the framework that allows certain crypto firms to qualify as state-chartered banks.
In an April 10 court filing, Wyoming Attorney General Bridget Hill filed a motion to “intervene in defense” of the state’s regulation of Special Purpose Depository Institutions, or SPDIs. Custodia – called Avanti at the time – was the first financial institution to be approved for a banking charter under the SPDI framework in October 2020.
Custodia filed a lawsuit against the Federal Reserve and its Kansas City arm in June 2020 for delays in approving the bank’s application for a master account, which facilitates an institution’s ability to make international transfers as well as other functions. In January 2023, the Fed officially rejected the bank’s application, saying it was “inconsistent with the required factors under the Act.”
“The [report] The Kansas City Fed provided Custodia to make clear that its view of perceived inadequacies in Wyoming’s laws and regulations for SPDI is partially responsible for its rejection, the lawsuit said. “The State of Wyoming believes this changes the substance of the case and calls into question the legitimacy and viability of the state’s statutory framework.”
Although Custodia filed suit in June 2022, the Fed released a report in March in which the central bank raised concerns that Custodia “sought to focus almost exclusively on providing products and services related to the crypto-asset sector.” Custodia spokesperson Nathan Miller told Cointelegraph at the time that the Fed’s decision was an example of “myopia and inability to adapt to changing markets.”
Hill pointed to the Fed’s arguments suggesting that Custodia was akin to an uninsured institution that “seeks to engage in multiple high-risk ventures in a high-risk industry” as part of the state of Wyoming’s concerns. The attorney general said the Wyoming Department of Banking had issued guidance on capital requirements for the state’s SPDIs.
“[The Fed has] also expressed skepticism about the suitability of “new” state-controlled banks while allowing “old” state-controlled banks like BNY Mellon to engage in essentially the same digital asset custody activity Wyoming SPDI intends to engage in, Hill said. “A disregard for Wyoming’s right to charter depository institutions in the two-tier banking system appears, at least in part, to be the motivation for this disparate treatment and disregard for Wyoming-chartered banks.”
Related: Wyoming’s private keys bill addresses growing threat to rights and assets
The legal battle could become a defining moment for how financial institutions in the United States that want to offer crypto custody services choose to obtain a charter under the federal or state system. BNY Mellon launched its digital depository platform in October 2022 – the first major US financial institution to do so – while the Office of the Comptroller of the Currency approved charters for Paxos, Protego and Anchorage as national trust banks in 2021.
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