The News: In a long shot to getting a master account, crypto bank Custodia sued the Federal Reserve on June 7th. The lawsuit alleges that the Federal Reserve has failed to act on the bank’s now 19-month-old master account application, despite an obligation to do so within one year of submission. Read the full suit here.
Crypto Bank Custodia Sues Federal Reserve in a Long Shot to Get a Master Account
Analyst Take: Crypto bank Custodia (previously known as Avanti) sued the Federal Reserve in a long shot to get a master account, and it’s also the next salvo in the bank’s strategy to become a federally regulated bank.
Caitlin Long, previously of Morgan Stanley, launched Custodia as a Wyoming-chartered Special Purpose Depository Institution (SPDI) in 2020. Almost immediately, in October 2020, she turned her attention to registering with the Federal Reserve as well.
No matter your opinion on the recent Wyoming legislation that established their existence, SPDIs are unquestionably banks – formally, depository institutions . One can quibble about safety and soundness, but a state ultimately owns the authority to create new state-chartered banks under the rules it chooses to establish.
But not all bank charters are made equal, and that’s the matter at issue here.
Custodia Cannot Fulfill Its Stated Mission Without Federal Reserve Access
The bank intends to be a bank for businesses that offers “a full suite of financial services for both U.S. dollars and digital assets that is tailored to business customers looking for enhanced regulatory clarity and minimized transactional risk.”
It’s that last part that’s key – minimized transaction risk.
A master account at the Federal Reserve would allow Custodia to deposit U.S. dollars at the Federal Reserve and clear U.S. dollar transactions without using an intermediary bank. It establishes a model whereby Custodia could store deposits from peer banks at the Federal Reserve and issue Avit, the bank’s proposed digital dollar, as a claim on those deposits.
We already have a name for this: it’s called a Narrow Bank.
History Doesn’t Repeat, But It Does Rhyme
The Narrow Bank tried the same approach as Long’s Custodia in 2019.
The Narrow Bank received a Connecticut-issued bank charter in 2017. Like Custodia, the bank did not seek FDIC insurance for deposits because the deposits would all be held at the Federal Reserve.
Master accounts for state-chartered banks are rarely denied. The Federal Reserve itself indicates on the application paperwork that processing usually only takes five to seven days. Eighteen months after applying, The Narrow Bank still did not have an answer, so it sued.
The Federal Reserve subsequently proposed new rules that would severely curtail any institution’s ability to pursue a similar model. The decision on whether to implement the rule remains outstanding.
While The Narrow Bank didn’t have the cryptocurrency trappings, its application looked like Custodia’s in all other major respects. It doesn’t bode well.
You’ll find me personally rooting for Caitlin Long and Custodia to succeed, as I did for The Narrow Bank. But I’m nonetheless realistic about the probabilities – the application is a long shot at best. This will be interesting to watch.
Disclosure: Futurum Research is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of Futurum Research as a whole.
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Jared is an Analyst in Residence at Futurum Research, where he helps guide our practice in all things Web3, the Metaverse, and cryptocurrencies so as to help business leaders understand how they work, why they matter, and how they can not only get involved, but become market leaders along the way.
Jared previously co-founded and served as President and Board Member of Triple Point Liquidity, a blockchain-based fintech startup serving alternative asset managers, their investors, and fund administrators. Prior to Triple Point, he held multiple roles at IBM including leading Digital Assets at IBM Blockchain, leading corporate development for Industry Platforms, and founding Watson Risk & Compliance.
Jared is author and podcast co-host at Fat Tailed Thoughts and serves as a trustee for The Williams School.
Jared holds an AB from Dartmouth College.