The crypto bank is battling the Kansas City Fed

A crypto bank has been waiting a very long time for approval from the Kansas City Fed – so long in fact that the oldest in the country traditional the bank caught up with crypto around this time.

why is it important: This is the latest chapter in the old story about the friction that arises between emerging players and incumbents in the race to adopt new technologies.

  • The new technology in this case is bitcoin and ether, and the players involved are the banks that want to hold these assets – keys and wallets included.

The big picture: Crypto wants to disrupt traditional banking, but it can’t do it without scaling.

  • And it cannot scale (attract large, well-heeled investors) without integrating into existing financial payment systems. So, while crypto banks are on ice, incumbent banks are settling in.
  • Indeed, it is the germination stage that will determine whether crypto-banks will emerge as significant players in the next cycle, or die on the vine in favor of big banks wanting to participate.

Enlarge: Custodia Bank, a Wyoming-licensed digital asset bank, wants to operate like many traditional banks, with a “main account.”

  • Having one allows businesses to store funds with the Fed and unlocks direct access to payment rails that allow banks to transfer money to each other, instead of through an intermediary.

State of play: The Kansas City Fed has yet to make a decision on Custodia’s candidacy. Custodia filed a lawsuit against the Fed in June for the delay.

The plot: Earlier this week, the oldest bank in the United States, BNY Mellon – a bank whose founders include Alexander Hamilton – announced that it would launch custodial services for bitcoin and ether.

  • In response, Custodia CEO Caitlin Long delivered scathing remarks at a fintech conference about the Federal Reserve’s different stance on crypto for new and old banks.

what she says“I’m about to make news,” Long told DC earlier this week. “You will see a file from my company in this lawsuit regarding this morning’s announcement,” a reference to BNY Mellon’s entry into crypto custodial services.

  • “Look at what the Fed actually said last week versus what it did today.”

What they say: In a filing last week, the Fed said, “In sum, Custodia’s request raises technical, complex and novel issues that pose a risk to [the Federal Reserve Bank of Kansas City] which potentially have implications for the stability of our country’s payment system.”

  • The Kansas City Fed declined to comment.

Meanwhile, Custodia asks why the review process for master account applications is a “black box” and takes so long, given that the application forms state that “processing may take 5-7 business days”.

  • This lengthy process “continues to inflict serious and irreparable harm on Custodia,” the bank’s lawsuit says.

The bottom line: Long noted the “favoritism” shown in the BNY Mellon news, arguing that the delay in Custodia’s main account application “benefits established financial institutions whose interests are represented on the Kansas City Fed Board of Directors. “, according to the Custodia filing on Wednesday afternoon.