Bitcoin Custodia Bank today sued the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City, accusing them of “illegally” delaying its primary account application with the Federal Reserve for 19 months. Federal Reserve.

The bank, licensed in Wyoming under a crypto-friendly law passed in 2019 allowing “special purpose depository institutions,” says the primary account would lower its costs and is “vital” to its core mission of providing a bridge between digital assets and the US dollar system.

According to the lawsuit, the Federal Reserve has a legal obligation to act within one year and states on its own documents that it generally takes only five to seven days to act on a main account request. Custodia’s lawsuit alleges that the Kansas City Fed’s processing of its request was advancing to the spring of 2021, when the top Federal Reserve became involved. The lawsuit seeks to force the Federal Reserve and the Kansas City branch to act on his request and ultimately approve it.

If Custodia wins its case or is awarded a master account, it would be the first bitcoin bank to win one. As central banks around the world seek to merge the best innovation offered by bitcoin and other blockchain-powered currencies, with the best in central management, the lawsuit — and the Fed’s reaction to it — could help define the very future of the bank.

“Through this lawsuit, Custodia seeks to ensure that its Federal Reserve Main Account Application receives the fair use and due process guaranteed to it by federal law and the United States Constitution,” the statement said. Custodia Bank spokesman Nathan Miller in a statement. “Custodia has satisfied all of the rules applicable to it, and gone above and beyond by applying to become a Fed member bank.”

Custodia Bank was founded by Morgan Stanley veteran Caitlin Long in 2020 as Avanti Financial Group. Unlike traditional banks that generate the lion’s share of their revenue from loans, Custodia was incorporated under the regulations of the State of Wyoming. Long helped write that this new type of bank should retain custody of the cryptocurrency it holds. In March 2021, it raised $37 million in Series A from investors including Binance.US, Coinbase Ventures, Morgan Creek Digital, Slow Ventures, and Susquehanna, bringing the total raised to $44 million.

Long became a critic of so-called remortgage, when banks lend money to others who lend that money to others in the aftermath of the Great Recession, when a similar practice with subprime mortgages led to multiple ownership claims on the same assets and masked bad debt among large lending groups. She worried that similar behavior in crypto would undermine the value derived from Bitcoin’s 21 million coin limit.

An early bitcoin advocate Long became one of the first traditional bankers to make blockchain her career in 2016 when she left her position as chief executive at Morgan Stanley to join New York-based Symbiont, a Enterprise blockchain startup founded by fellow bitcoin early adopters who wanted to capture the best of distributed ledger technology like blockchain, but in a way that respects privacy rules and the large volumes served by large corporations.

After helping bring $7 trillion asset manager Vanguard into one of Symbiont’s first clients, Long branched out into building financial products that leveraged bitcoin directly. To combat the proliferation of remortgaged bitcoins, Long created Custodia to provide accounts for crypto businesses that would help them pay their employees and taxes, but generate revenue by charging fees for services other than lending.

To do this, his bank would need a main account with the Fed, like all federally chartered banks, which would essentially turn them into a direct line to the regulator. This was crucial to the bank’s business model, the statement said, as it would allow them to “dramatically reduce costs and bring new products and options to financial service users.”

“This delay in processing Custodia’s Master Account Application results in substantial and continuing harm to Custodia,” according to the lawsuit. “The immediate hurt is that the delay has forced Custodia to postpone its solo entry into the financial services market in favor of a decidedly second-best and far more expensive alternative: launching with a correspondent bank – which has a main account – while Custodia awaits a decision on its long-pending application.

The filing further claims that the Kansas City Fed received Custodia’s business plan in May 2020 and confirmed that Custodia’s master account application, submitted in late October 2020, was complete. In early 2021, a Kansas City Fed representative informed Custodia that there were “no impediments” with the request, according to the filing.

Custodia’s 44-page lawsuit lists eight claims for relief or ways the Fed could potentially resolve the case. The first allegation raises a broader question regarding the operation of the various Federal Reserve banks and whether they are subject to federal agency rules, including the Administrative Procedure Act and due process requirements. The lawsuit says that while the Federal Reserve of Kansas City is considered a private entity (its board of directors is made up of a majority of private sector officials, not appointed by the president), it also cannot take Final decisions on the issuance of major accounts without Federal Reserve Board review, or when exercising governmental powers, are subject to the higher level of scrutiny enjoyed by governmental actors.

The Kansas City branch of the Federal Reserve declined to comment on the lawsuit.

Initially slow to act on the innovations underlying bitcoin, which allow value to move without central authorities, the Federal Reserve has largely let other countries take the lead in incorporating lessons learned. In 2020, China launched public trials of its own Central Bank digital currency, and the Fed itself has expressed interest in letting the private sector innovate in the form of so-called stablecoins that are backed by assets like the US dollar, but created by private companies. . In 2020, Long revealed her own plans for what would amount to a stablecoin, but since she was planning on a Fed account, it would be akin to a digital cashier’s check, which could have resulted in a regulated digital dollar.

In May, a stablecoin backed in part by bitcoin, a cryptocurrency called Luna, and stabilized using an algorithm that controlled supply, called TerraUSD, crashed, wiping out $60 billion in value and leading to calls for greater regulation of space. The bipartisan regulations proposed this morning by U.S. Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) would partially address the issues with the lawsuit if implemented. Among a number of sweeping requirements, the Responsible Financial Innovation Act would require the Fed to issue routing numbers to depository institutions, prohibit federal bank agencies from delaying requests under current law, and require that they decide on all requests within one year.

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