Custodia Banks kamp för ett Fed Master-konto förklarad

Från krypto till bankverksamhet

Crypto firms are evolving and converging closer to traditional financial institutions like banks and credit unions. They are also getting into more friendly terms with the regulators, as recently illustrated by the approval for Gemini (GEMI ) from the U.S att verka som en Designated Contract Market (DCM) och gå in på förutsägelsemarknaden.

Andra kryptoföretag går ännu längre, särskilt med Custodia Bank som vill skaffa ett Fed master-konto, vilket skulle ge dem samma privilegier (och ansvar) som en “verklig” bank.

Detta är en del av en allmän tendens bland många kryptoföretag att ansöka om att bli en bank, eller åtminstone något liknande en bank.

Dock är vägen till att uppnå detta mål inte så smidig för Custodia, som har nekats att skapa ett Fed master-konto. Företaget begär nu officiellt att hela Tenth Circuit Court of Appeals ska granska US Fed:s beslut, där det juridiska beslutet potentiellt kan få stora konsekvenser inte bara för krypto, utan för hela det amerikanska banksystemet.

Vad är ett Federal Reserve Master-konto och varför är det viktigt

The Federal Reserve’s master accounts have been in existence ever since the Fed was created more than a century ago and began maintaining deposit accounts for member banks.

A Fed master account is a bank’s deposit account at the Reserve Bank, which gives that bank direct access to the central bank’s payment systems, like Fedwire and FedNow.

The account is possessed by all federally chartered banks, and the services offered to a master account are similar to what customers get from their banks.

So, this account is used by a financial institution to hold funds and make electronic transfers of money between banks, as the accounts are interconnected to facilitate payments between different institutions. Access to payment systems also allows the holder to clear and settle transactions electronically.

For now, many crypto-focused financial institutions operate under limited regulatory frameworks such as state trust charters, money services business (MSB) registrations, or Wyoming’s Special Purpose Depository Institution (SPDI) charter. While these structures allow certain banking-like activities such as custody and fiduciary services, they do not grant full banking powers such as lending or automatic access to Federal Reserve master accounts.

This limited charter allows these firms to perform some banking tasks, like custody of digital assets, fiduciary services, etc. But they do not allow for lending, for example, and a traditional bank charter also grants FDIC-försäkring for its deposits.

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Custodia Banks juridiska överklagande mot Federal Reserve

Bakgrund

For now, Custodia Bank is a Wyoming-chartered special purpose depository institution that is not a member of the Federal Reserve.

Previously, Custodia Bank argued that it should be granted automatic master account access because it holds a state banking charter. A request that was denied by the Kansas City Fed regulator.

This came as a surprise to the company, as it initially had received encouraging feedback.

“Den 29 oktober 2020 ansökte Custodia om ett master-konto. Federal Reserve Bank of Kansas City berättade för Custodia att de “var juridiskt berättigade” för kontot och att “det inte fanns några ‘showstoppers’ i deras ansökan.”

I interna memorandum bedömde deras personal Custodias kapital som “tillräckligt” och dess likviditetsrisk som “låg”, samtidigt som de berömde dess “starka” riskhantering och “imponerande” ledningsteam.

The argument for denying the request was that Custodia’s crypto-focused business model introduced undue risk into the Fed’s payment systems and services.

Stater vs Fed

In its appeal, Custodia argues that the panel has misread the Monetary Control Act, which it asserts entitles any eligible bank to a master account.

It also argues that this decision undermines state banking authority.

“När Fed nekar ett master-konto till en delstatligt charterad finansiell institution, viker den i praktiken ett bankcharter som delstatliga regulatorer har godkänt.”

This indeed could be the most important part of the argument, as it goes beyond Custodia Bank or even crypto in general.

The USA is organized in a federal structure, and the rights of individual states should not, at least in theory, be submitted to arbitrary decisions by the federal government.

Of course, in practice, legal experts will debate what is and what is not an infringement on states’ rights.

Godtyckliga beslut kontra rättsstatsprincipen

Another criticism of Custodia Bank about this decision is that it gives excessive power to administrative personnel like mid-level Fed officials (regional bank presidents) who are not appointed as either principal or inferior officers under Article II of the Constitution.

According to Custodia, the decision also represents a departure from the application of the law so far.

“Det avvek också från 35 års historia: i årtionden tolkade inte Fed MCA som att ge makt att debanka finansiella institutioner.”

“Panelens beslut invaderade delstaternas grundläggande regulatoriska prerogativ och placerade Fed i konstitutionell kvicksand.”

Vad händer härnäst i Custodias Fed Master-konto-fall

Det senaste överklagandet

What Custodia Bank is asking for is a procedure called a “rehearing en banc”. This is an “extraordinary procedure” only granted in cases of exceptional public importance, or when a ruling directly contradicts another ruling by the same circuit or the Supreme Court.

Statistically, the odds of receiving such a rehearing are extremely low.

However, Custodia insists that it is needed, as the decision erodes states’ rights when it comes to control over banking.

“Panelens beslut tillåter Fed att reducera delstatliga charter till ingenting, i praktiken radera delstaternas historiska charterprivilegier.”

“Panelens beslut ger således Fed ett veto mot delstatliga charter.” “Om Fed anser att vissa banker—eller hela kategorier av banker—inte bör charteras, kan de neka dessa banker ett master-konto.”

It also raises constitutional questions about the authority granted to the mid-level Fed officials.

“Enligt artikel II i konstitutionen får presidenter för regionala Federal Reserve Banks inte utföra uppgifter som skulle göra dem till “Officer of the United States”.”

Endast presidenten kan utnämna “huvud” tjänstemän, och “endast presidenten, en domstol eller en avdelningschef” kan utnämna “underordnade” tjänstemän.

Presidenter för regionala Federal Reserve Banks väljs dock inte på något av dessa sätt. ”

So the discussion seems to be extending from crypto banks’ access to master accounts, to a broader discussion of the true reach of the Federal Reserve power, independently from US States or elected officials.

However, this decision seems to go in the opposite direction of Fed:s plan för “Skinny” master-konton. These would not include overdraft privileges or interest on balances, but still represent a major improvement for crypto companies looking to access the sort of privilege reserved for banks until now.

Konsekvenser

According to Custodia Bank itself, this could spell doom for the company.

“Att stänga en banks master-konto—eller vägra öppna ett—är i praktiken att döma banken till döden.”

The company sees this refusal as part of a larger effort to “debank” it entirely, accusing the Fed officials of aiming for this exact goal.

“Den 27 januari 2023 nekade Kansas City Fed Custodias ansökan om master-konto.

Sedan dess har Fed-tjänstemän utövat “regulatoriskt tryck” mot Custodias bankpartners, tydligen i ett försök att debanka Custodia helt.”

So not only might Custodia Bank not have its own access to a Fed master account, but it could ultimately lose all access if its banking partners follow this direction and refuse to collaborate in the future.

Kommer Custodia faktiskt att vinna ett Fed Master-konto?

In general, there has been a trend over the past decade of members of the administration and judges to take more and more decisions that would maybe have been handled by other parts of the government in the past, be it the Federal Reserve or the Supreme Court.

So even if you believe Custodia Bank is right in its argumentation, this does not necessarily bode well for its chance at winning its appeal and obtaining a rehearing en banc.

And after all, it has been 5 years that Custodia has been trying to obtain a Fed master account, so far unsuccessfully.

So while crypto enthusiasts might hope otherwise, the prospect of a quick reversal of this decision seems rather unlikely.

On the other hand, by escalating the discussion about the constitutionality of the decision as well as making it about states’ rights versus the Federal Reserve legal reach, the appeal might put the hand of the Wyoming legislators and politicians to apply their own pressure on the Fed and judges, as the state is aiming to become a major “crypto friendly” jurisdiction.

Slutsats

What sounds at first glance like a dry and boring legal debate (and it is also that) could have wide-reaching consequences not only for Custodia Bank, but the crypto sector as a whole.

It could even affect the discussion of how the respective prerogatives of the US states and the Federal Reserve are shared, and who decides when they disagree with each other.

Right now, the chances of Custodia Bank getting a Fed master account seem rather slim.

However, maybe the plans for “skinny” Fed master accounts could allow for a compromise midway: not fully denying Custodia’s request or “sentencing the bank to death”, but also not acknowledging the legal basis of its appeal, as the ramifications of that decision would go way beyond the discussion of giving crypto firms access to the Federal banking payment system.