Wyoming defends crypto-friendly bank charter regime in Custodia Bank's lawsuit with Fed

The U.S. state of Wyoming has requested to intervene in the case between Custodia Bank and the Federal Reserve System, seeking to defend its framework allowing 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 the 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 bank 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 law.”

“The [report] the Kansas City Fed provided Custodia makes clear that its view of perceived inadequacies in Wyoming’s laws and regulations for SPDIs is partially responsible for its denial,” said the court filing. “The State of Wyoming believes that this changes the tenor of the suit and in turn questions the legitimacy and viability of the State’s statutory framework.”

Though Custodia filed its lawsuit in June 2022, the Fed released a report in March in which the central bank raised concerns about Custodia “seeking to focus almost exclusively on offering 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 “shortsightedness and inability to adapt to changing markets.“

CUSTODIA STANDS FIRM IN RESPONSE TO THE FED pic.twitter.com/xXWGjffU3I

— Custodia Bank ™ (@custodiabank) March 24, 2023

Hill pointed to the Fed’s arguments that suggested Custodia was akin to an uninsured institution “seeking to engage in multiple high risk endeavors in a high-risk industry” as part of the state of Wyoming’s concerns. The Attorney General said the Wyoming Division of Banking had issued guidance on capital requirements for the state’s SPDIs.

“[The Fed has] also expressed skepticism over the aptitude of ‘new’ state-chartered banks while allowing ‘old’ state-chartered banks like BNY Mellon to engage in substantially the same digital asset custody activity Wyoming SPDIs intend to engage in,” said Hill. “A disregard of 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 of Wyoming-chartered banks.”

The court battle could become a defining moment for how financial institutions in the United States seeking to provide crypto custody services choose to get a charter under the federal or state system. BNY Mellon launched its digital custody platform in October 2022 — the first major U.S. 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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