A Wyoming-chartered digital asset bank has accused the Federal Reserve of playing favorites in deciding which institutions can custody crypto assets.
Custodia Bank, in a memorandum filed in the U.S. District Court of Wyoming on Wednesday, argued that the Bank of New York Mellon's newly launched crypto custody service demonstrates a double standard by the central bank that puts upstart firms at a disadvantage to legacy banks.
"Last week, the Federal Reserve told a federal judge that keeping custody of digital assets like Bitcoin posed a 'novel, precedent-setting risk.' This week, the Fed allowed BNY Mellon to do the exact same thing," Nathan Miller, a spokesperson for Custodia, said in a statement. "So, it has one rule for innovators like Custodia Bank, and another for the nation's oldest bank. After waiting more than 24 months, we are seeking nothing more than fair and equal treatment."
Custodia, which aims to provide crypto custody and digital asset payment services, is suing the Fed over its pending application for membership with the Federal Reserve Bank of Kansas City and access to the Fed's payment system. The firm is hoping to compel the Fed to make a decision on its master account bid.
In court filings, the Fed said Custodia's business model "
Allowing BNY Mellon to custody cryptocurrencies such as bitcoin and ether contradicts this stance, Custodia argued in its memo, and shows that the Fed is not giving fair treatment to upstart firms or Wyoming's special-purpose depository institutions, a relatively new charter the state devised specifically for digital-asset banks.
"[T]his recent development aligns precisely with the allegations of favoritism raised by Custodia's Complaint, whereby delay in adjudicating Custodia's master account application 'benefits the established financial institutions whose interests are represented on the Board of Directors of the Kansas City Fed' while undermining the competitive advantage of Custodia's SPDI charter," Custodia's memo said. "It also crystallizes the lack of respect shown by Defendants for Wyoming and the carefully crafted SPDI charter enacted by the State."
It is unclear what role the Fed played in greenlighting BNY Mellon's foray into digital-asset custody. The central bank declined to comment on the matter.
The Office of the Comptroller of the Currency, which supervises BNY Mellon's nationally chartered trust company, and the New York State Department of Financial Services, the bank's state regulator, also declined to discuss the process for granting the bank approval to handle cryptocurrencies.
In an August letter, the Fed directed the banks it supervises to contact their supervisory points of contact at the Fed and notify them before engaging in crypto-related activities so they can receive guidance. Banks would have to show they have adopted "adequate systems, risk management, and controls to conduct crypto-asset-related activities in a safe and sound manner" to get approval.
Caroline Butler, CEO of custody services at BNY Mellon, said the bank had "very productive and very constructive conversations with our regulators" and ultimately gained their approval before launching the crypto-focused service.
"As the world's largest custodian, we interface with a lot of regulators across the industry, and we've had very positive conversations with them," Butler told American Banker. "I do think, given that we've got regulatory approval here in the U.S., that's a testament to the institutional-grade standards that we've brought to this particular capability, this particular part of the digital asset landscape. And we look forward to the continued engagement with our regulators, because they've trusted us to provide custody in the markets."
Julie Hill, a University of Alabama Law School professor who specializes in financial regulation, said BNY Mellon's entrance in the crypto field highlights the significance of the Fed's guidance on the matter in August. She said it will also set the stage for more banks entering the business sooner than many in and around the banking sector had anticipated.
"Before this, we weren't entirely sure people were going to get through during this current presidential administration," Hill said. "It's somewhat skeptical of crypto."
Yet, with so little information being made public from BNY Mellon and its regulators — including which specific entity will handle crypto custody, the standards the bank had to meet in order to get regulatory approval and how digital assets will be treated from an accounting perspective — it is difficult to draw many conclusions about the path the bank took to get regulatory approval and which organizations might be able to follow in its footsteps, Hill said.
One thing that does seem to be clear is that banks already subject to federal regulation seem to have the upper hand, she said.
"Folks like Custodia were hoping to get in first and get established before some of the big banks got into the space," Hill said. "It might be that the Fed, in particular, is more excited to have Bank of New York Mellon do it than they are to have a newly chartered bank with a fairly unique charter type do it."
