The Federal Reserve is at the center of a whirlwind of public scrutiny following recent banking failures.
All sides are livid. Democrats, including President Joe Biden himself, quickly pointed to rollbacks of Dodd-Frank Act regulatory authorities passed in 2018 during the Trump administration as the cause of banking instability.
Republicans, meanwhile, are calling for examinations into “regulators’ lack of basic supervision and enforcement of safety and soundness rules, regulations, and principles,” as a joint statement from Sen. Tim Scott and Rep. Patrick McHenry phrased it.
The crypto world is outraged in particular at the closure of Signature Bank. Board leader Barney Frank — the Frank of Dodd-Frank — said the closure was a killshot aimed at the firm’s crypto business and that the bank was not itself insolvent.
Monday’s news that the Federal Deposit Insurance Corporation (FDIC) had sold off Signature’s assets except for its $4 billion in deposits for crypto-linked clients seemed to confirm at least the former suspicion. Crypto firms accounted for just 20% of Signature’s deposits.
“Scandal, outright scandal,” Custodia Bank CEO Caitlin Long said of the takeover of Signature on an Unchained podcast to be published Tuesday. “This is theft of private property by regulators who did not have the authority to take a solvent bank and put it into receivership.”
Long is the founder of Custodia, formerly known as Avanti, a Wyoming-registered, crypto-native bank and custodian. In that capacity, Long is currently part of a major suit against the Federal Reserve, which has become an interesting case study in light of recent events. Custodia’s application was first rejected in January.
“It wasn’t clear what was happening to us,” Long told Laura Shin. “We were in the fog of war, [it’s now clear] we were the tip of the spear.
Custodia is seeking a coveted “master account” with the Fed, which has repeatedly rejected the firm’s application, as well as applications from many other fintech firms.
Such an account provides direct access to the Fed’s payments systems. The Federal Reserve put out new guidance in August on new types of financial institutions looking for access. No such institutions have made their way in.
Core to the dispute is that Fed accounts were originally designed for traditional banks, which take in client deposits and then lend them out for more interest than they pay out. Banks keep a small portion of reserves on hand but are, ultimately, vulnerable to runs like the one that hit Silicon Valley Bank, kicking off the ongoing mayhem in the sector.
That said, Custodia’s model is different: Long says her bank doesn’t make money by lending user money out for more interest than it’s paying. Instead, Custodia’s model is to charge depositors fees. It would be impervious to such a bank run, as it would keep more than its total deposits on hand, Long argues.
It’s an argument that is catching on among crypto moguls as they are lamenting a banking system lockout.
Jeremy Allaire, CEO of Circle, whose USDC stablecoin depegged on news that $3.3 billion of its reserves were in Silicon Valley Bank, tweeted about the need “to mitigate risks extending from the fractional banking system” into cryptocurrency.