Custodia Bank

US Fed to create new crypto team amid concerns about unregulated stablecoins

The Fed’s vice chair for supervision said that the central bank does not want to curb innovation but ensure that regulations protect households and the financial system.

The United States Federal Reserve is set to create a “specialized team of experts” to keep up with developments in the cryptocurrency industry, according to a Fed official, amid concerns from the central bank about “unregulated” stablecoins.

Speaking at the Peterson Institute for International Economics in Washington on March 9, Vice Chair for Supervision Michael Barr admitted that crypto could have a “transformative effect” on the financial system but added that “the benefits of innovation can only be realized if appropriate guardrails are in place.”

According to Barr, the new crypto team will help the Federal Reserve “learn from new developments and make sure we’re up to date on innovation in this sector.” He added:

“Innovation always comes quickly, but it takes time for consumers to become aware that they could both gain and lose money on new financial products.”

Meanwhile, Barr noted that regulation needs to be a “deliberative process” to ensure a balance is reached between over-regulation that “will stifle innovation” and under-regulation that “will allow for substantial harm to households and the financial system”

Related: Fed signals a sharp rate hike in March due to inflation — Here’s how Bitcoin traders can prepare

One subsect of crypto that Barr highlighted as a point of concern was stablecoins.

He said that the assets backing many stablecoins in circulation are illiquid, meaning that it can be difficult to liquidate them for cash when needed, arguing:

“This mismatch in value and liquidity is the recipe for a classic bank run.”

He believes that unless regulated by the Fed, any widespread adoption of stablecoins could put households, businesses and the broader economy at risk.

Caitlin Long, the CEO of Custodia Bank — which has consistently been rejected from joining the Federal Reserve System — pointed out the irony in the comments from Barr given her belief that Silvergate Bank collapsed due to liquidity issues arising from a bank run.

Long also pointed to the current issues facing Silicon Valley Bank, whose shares plummeted after a March 8 financial update disclosed that it sold $21 billion worth of its holdings at a $1.8 billion loss, prompting fears that it was forced to sell to free up capital.


US Federal Reserve denies Custodia Bank’s request for Fed supervision

The Federal Reserve Board has denied the request from crypto-focused Custodia Bank to reconsider its membership to the Federal Reserve System.

The United States Federal Reserve has denied a request from cryptocurrency bank Custodia Bank to reconsider its membership application to the Federal Reserve System, while a district court has allowed a lawsuit between the two parties to continue to play out.

The central bank announced its membership denial on Feb. 23, noting the Federal Reserve Board previously decided that Custodia’s application “was inconsistent with the required factors under the law.”

The Fed rejected Custodia’s application to become a member in January, around four years after it applied for it in 2019. Board rules allow applicants to request a reconsideration of membership decisions.

At the time of the rejection, the Fed claimed Custodia had an “insufficient” management framework.

It also cited a joint declaration it made alongside the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency that claimed cryptocurrencies were “inconsistent with safe and sound banking practices.”

Custodia has said it wishes to join the Federal Reserve System so it can be regulated under the standards that apply to traditional banks and open a path for other crypto-banks that wish to be held to those same heightened standards.

Cointelegraph contacted Custodia, which declined to comment on the matter.

Lawsuit to play out

Earlier this week, on Feb. 22, a Wyoming District Court judge denied a motion from the Fed board to dismiss a lawsuit from Custodia over a more-than-two-year delay for a Federal Reserve master account.

A master account would allow Custodia to access the Federal Reserve payment systems without using a third-party bank. The Fed denied Custodia’s master account application on Jan. 27, more than two years after it applied for the master account in October 2020. 

Related: IMF exec board endorses crypto policy framework, including no crypto as legal tender

The Fed then moved to dismiss the case due to the account denial making the lawsuit moot. However, Custodia filed a proposed amended complaint on Feb. 17, alleging the Fed unfairly singled out and rejected its application as part of a “concentrated and coordinated” effort with President Joe Biden’s administration and asked the court to overturn the decision.

In a Feb. 17 statement, Custodia spokesperson Nathan Miller said the complaint “zeroes in on the core legal issue: whether Congress even granted the Fed discretion to decide master accounts at all.” He added the Fed “forced the hand” of the crypto-bank, “which tried every avenue to find a reasonable path forward.”

The judge has ordered Custodia to file its first amended complaint to the court by March 1.

Custodia Bank CEO slams Washington’s ‘misguided crackdown’ on crypto

Caitlin Long revealed that she had warned government agencies of major “fraud” in the crypto space months before several firms went bankrupt.

The CEO of Custodia Bank, Caitlin Long, has slammed regulators and lawmakers in Washington D.C. for their “misguided crackdown” on the crypto sector and ignoring her warnings of major “fraud” allegedly conducted by now-bankrupted entities.

In a Feb. 17 blog post titled, Shame On Washington, DC For Shooting A Messenger Who Warned of Crypto Debacle, Long tore into the government for its approach to crypto regulation, failing to protect investors and alienating good actors in the space:

“Washington’s misguided crackdown will only push risks into the shadows, leaving regulators to play whack-a-mole as the risks continuously pop up in unexpected places.”

Long stressed that with her digital asset custody firm, she’s “been calling out the worst of crypto while trying to build a lawful, compliant alternative that relegates scams to the trash heap. But […] most of today’s policymakers seem intent on killing the high-integrity innovators.”

The Custodia Bank CEO claimed that her efforts to work with government agencies were ultimately thrown back in her face as she recounted the spate of negative run-ins her firm has had of late. 

“Custodia was simultaneously attacked by the White House, the Federal Reserve Board of Governors, the Kansas City Fed and Senator Dick Durbin (who conflated our non-leveraged, 100-percent liquid and solvent bank with FTX in a Senate floor speech),” she said, adding that:

“Custodia tried to become federally regulated – the very result bipartisan policymakers claim to want. Yet Custodia has been denied and now disparaged for daring to come through the front door.”

Her sentiments echo that of figures such as Coinbase CEO Brian Armstrong, who has suggested on multiple occasions that agencies like the Securities and Exchange Commission (SEC) have reacted frostily to his firm’s efforts to maintain a dialogue in good faith.

Earlier this month, Armstrong also criticized the lack of regulatory clarity in the U.S. and what appears to be a “regulation by enforcement” approach following the SEC’s move to shut down Kraken’s staking services on Feb. 9.

“Today’s regulators and lawmakers in Washington are no doubt embarrassed that they failed to stop the criminals of crypto. DC is demanding scalps,” Long wrote in the blog post, adding that:

“Calls for a crackdown today are coming from many of the same policymakers who were charmed by the fraudsters. In a 180-degree turn, they’re now throwing the baby out with the bathwater.”

Unheeded warnings

Over on Twitter, Long also suggested that well before the implosion of several crypto firms in 2022, she and many others had tried to warn Washington and “help law enforcement stop” major fraud, but to no avail.

Related: SEC vs. Kraken: A one-off or opening salvo in an assault on crypto?

Long publicly disclosed for the first time that she had “handed over evidence to law enforcement of probable crimes” committed by an unnamed crypto firm “months before that company imploded and stuck its millions of customers with losses.”

Kraken co-founder and CEO Jesse Powell responded to Long’s Twitter thread and corroborated her statements by noting that: “I can’t tell you how infuriating it is to have pointed out massive red flags and obviously illegal activity to regulators only to have them ignore the issues for years.”