Why Fed Rejects Crypto Banks With ‘100% Reserve Assets’? | coindesk JAPAN | Coindesk Japan

The past few weeks have seen some news related to crypto assets (virtual currencies) and banking.

The still-to-be-launched Custodia Bank, founded by Caitlin Long, was rejected a few weeks ago by its application to join the Federal Reserve.

Crypto asset (virtual currency) exchange Binance has announced that it will suspend US dollar bank transfers from February 8 due to the relationship with the bank it trades with.

Others include Signature Bank, which faced a class action lawsuit in connection with FTX; ) was also reported.

And the cryptocurrency industry has been heavily criticized.

Crypto Assets and Banking News

In a way, it makes sense.

Because Binance is the most well-known brand in the cryptocurrency industry. Lawsuits against banks (especially if related to FTX) are flashy and high-profile. Juno offers FDIC (Federal Deposit Insurance Corporation) checking accounts (which means it was considered a reliable bank).

However, Binance often clashes with US regulators. Is it really surprising that it is struggling with American banks?

By the way, very few Binance customers use bank transfers in US dollars, and Binance’s US division will be largely unaffected. So, there’s little to worry about.

The lawsuit against Signature is just a lawsuit. If you ask celebrities involved in crypto-related publicity, such as actor Matt Damon, NBA player Stephen Curry, and former NFL star Tom Brady, the names of people who have been sued for crypto-related assets are many. deaf.

Juno provides interest on FDIC-insured accounts, and given how dismal 2022 was, it was such a shock to have outside influences that disrupted operations. is that what it is?

None of this should be big news.

But the addition of Custodia Bank to the news is a big surprise. The news of being rejected by the Fed deserves a bigger reaction than all the other stories combined.

What’s wrong with custodian banks?

Custodia Bank is challenging banking in a different way. Custodia aims to be a compliant bridge between crypto and U.S. dollar payment systems. With that in mind, read the Fed’s statement below, which excuses its denial of custodial applications.

“The company’s novel business model and proposed focus on crypto assets presents significant risks around safety and soundness. We have made it clear in the past that there is a high probability that we will be incompatible.”

This explanation is somewhat plausible.

By “previously clear,” we refer to a statement dated January 3 that listed the many risks cryptocurrencies pose to the banking system, including fraud and inaccurate disclosure by cryptocurrency companies. pointing.

The statement also addresses legal uncertainties related to custody operations, market volatility, the risk of a run on stablecoins, the risk of contagion, and the risk of “open, public and decentralized networks or similar systems.” ” and so on are listed.

Where it becomes absurd is when you compare the strategy and mission presented by Custodia Bank with the wording of the Fed’s explanation of why it was rejected.

“It is important that risks associated with crypto assets that cannot be mitigated or controlled do not spill over into the banking system.”

However, reducing and controlling such risks is exactly what Custodia Bank is aiming for. Custodia is a licensed special purpose depository institution (SPDI) in Wyoming. In other words, it is a bank primarily engaged in the custody of assets, whose focus is on safe custody of assets and efficient settlement of transactions.

Custodian banks are SPDI licensed, which means they are required to maintain unencumbered liquid assets (such as cash and US Treasuries) worth at least 100% of their deposits. Custodia will hold at least $1 in reserves for every $1 a customer deposits.

That means, unlike almost all banks, custodia doesn’t need FDIC insurance to protect customer deposits from bankruptcy.

Many banks are “partial reserves”

In fact, as shocking as it may sound, most banks need the FDIC because they are not obligated to hold reserves equal to or greater than all of their deposits.

Almost all banks, especially the big ones, have a “fractional reserve banking system” in which only a portion of their deposits is always available for withdrawal by customers. If that sounds scary, it’s because it is, to some extent. As we’ve risked our lives to learn, things go well until the moment things go wrong.

When things get really bad, or when banks run into trouble, customers flock to banks to withdraw their deposits. In the case of partial reserves, there may not be enough funds to meet withdrawals. In other words, there will be bank runs. Bank runs are nasty.

But with enough assets, a bank run is unlikely. The story is extremely simple.

common sense regulations

Without the Custodia Bank incident, I don’t think the cryptocurrency and banking news I introduced at the beginning would have been worthy of attention.

With much of the cryptocurrency based on a state bordering on obscure securities laws, the unease surrounding Binance, Signature and Juno is not surprising on its own.

But it would be surprising if there was any trepidation about a “full reserve bank” serving crypto firms.

This article is not intended as a PR for Custodia Bank. Nor does it attempt to promote a requirement for a full reserve bank. As a bitcoiner, there is no benefit for me to promote a bank.

But I advocate the need for more common sense regulation. Why is this discussion necessary in the first place? Since crypto assets are not illegal, licensed banks with fully reserve assets that wish to provide financial services to crypto companies should not be prevented from achieving their objectives.

Is there something else that scares organizations like the Fed when they see or hear the word “crypto assets”?

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
| Image: Caitlin Long, CEO of Custodia Bank (CoinDesk archives)
｜Original: Aspiring Crypto Bank’s Plight Shows Binance’s Issues Are Just Part of the Story