Wyoming defends crypto-friendly banking charter regime in Custodia Bank’s lawsuit against Fed

Wyoming defends crypto-friendly banking charter regime in Custodia Bank’s lawsuit against Fed

“The State of Wyoming believes this changes the tenor of suit and in turn, questions the legitimacy of the State’s statute framework,” stated Attorney General Bridget Hill.

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Wyoming, the United States of America, has asked to intervene in the Custodia Bank vs Federal Reserve System case. It is seeking to defend its framework that allows certain crypto-firms to be state-chartered banks.

Wyoming Attorney General Bridget Hill filed in court on April 10, a motion to “intervene” in defense of the state’s regulation Special Purpose Depository Institutions (or SPDIs). Custodia, also known as Avanti, was the first financial institution to be approved for a bank charter within the SPDI framework in October 2020.

Custodia sued the Federal Reserve in June 2020 over delays in approval of the bank’s master account application. This allows an institution to make international transfers and other functions. The Fed officially rejected the bank’s application in January 2023. It stated that it was not consistent with the requirements of the law.

According to the court filing, “The report that the Kansas City Fed gave Custodia shows that it views the inadequacies in Wyoming’s laws and regulations regarding SPDIs partially accounts for its denial.” “The State of Wyoming believes this alters the tenor of suit, which in turn raises questions about the legitimacy and viability of State’s statutory framework.”

Custodia filed the lawsuit in June 2022. However, the Fed published a report March in which it raised concerns about Custodia’s “seeking almost exclusively to offer products and services related crypto-asset sectors.” Nathan Miller, Custodia spokesperson, said that the Fed’s decision was a case of “shortsightedness” and “inability to adapt to changing market conditions.”

Hill cited the Fed’s arguments suggesting that Custodia was similar to an uninsured institution “seeking multiple high risk ventures in a high–risk industry”, as part of Wyoming’s concerns. According to the Attorney General, the Wyoming Division of Banking had provided guidance regarding capital requirements for state-sponsored SPDIs.

Hill stated that “[The Fed] has also expressed doubt over the ability of ‘new state-chartered bank’ while allowing old’ state-chartered banking institutions like BNY Mellon and Wyoming SPDIs to engage substantially in the same digital asset custodial activity.” “A disregard for Wyoming’s right in two-tier banking system to charter depository institutions appears to have been the reason for this disparate treatment of Wyoming-chartered banks.”

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This court battle could be a turning point in how US financial institutions that offer crypto custody services decide whether to charter under the state or federal system. BNY Mellon launched their digital custody platform on October 20, 2022, becoming the first U.S. financial institution doing so. In 2021, the Office of the Comptroller of the Currency approved charters to Paxos and Protego as national trust banks.

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