The federal government is cracking down on the crypto industry

The crypto industry started the year with some wins under its belt, from Republican allies taking over key House committees to a surprising rally in the price of Bitcoin. It’s also been an entire 12 days since a major company declared bankruptcy, which we’ll file under the positive development category.  

That streak ended last Friday with two (apparently) unrelated governmental actions: The White House released a “road map” to mitigating risks posed by crypto, and the Federal Reserve denied the membership application for Custodia, a digital assets bank.  

While both moves may seem like administrative paper-pushing, they reflect a harsher stance from the federal government toward crypto—an outcome that should have been expected given the wreckage left behind by the industry over the past months.

The Custodia decision sends a signal that the Federal Reserve is not giving companies any points for playing by the rules. Led by industry veteran Caitlin Long, Custodia has gone through the proper channels of becoming a “special purpose depository institution” in Wyoming, which, among other stipulations, means that it can’t lend money and has to hold liquid backing for all its deposits.  

The crypto industry is currently undergoing a banking crisis as players like Silvergate and Signature hemorrhage money. In an interview with Coins2Day, Long argued that Custodia’s unique structure would offer stability and prevent bank runs—something not guaranteed by currently available options. With crypto companies increasingly finding back doors into traditional finance, such as with Alameda Research’s investment in Moonstone né Farmington State Bank, she said that regulators are lucky the FTX implosion happened as early as it did.  

“It’s important to have a safe and sound connection between the traditional financial system and the digital asset financial system,” she told Coins2Day.  

In Friday’s release, White House officials made clear they believe the two can remain separate, writing that any new legislation from Congress should not allow mainstream institutions—like pension funds or, presumably, the banking system—to “dive headlong into cryptocurrency markets.”  

For those keeping count at home, the Federal Reserve and White House ostensibly operate independently from each other. That the two intertwined actions came on the same day should raise at least a few eyebrows.  

Custodia has raised such concerns about intergovernmental coordination in the past. The bank still has a lawsuit pending against the Kansas City Federal Reserve for a different application to operate with a “master account,” which would allow it access to Fed payment services, including money transfers between banks. Custodia has blamed the Board of Governors in Washington, D.C., for slow-rolling the application behind the scenes—an accusation that the judge overseeing the case described as plausible in November. 

The relationship between the White House and the Federal Reserve could grow even closer, as top Biden adviser Brian Deese—who helped pen Friday’s crypto road map—prepares to vacate his position at the National Economic Council.  

Rumored to be a front-runner? One of the most outspoken voices at the Federal Reserve on crypto’s threat to traditional finance, Vice Chair Lael Brainard.  

The setback for Custodia is likely a sign of austere times to come for the crypto industry.  

Leo Schwartz
[email protected]
@leomschwartz

DECENTRALIZED NEWS

Strike  launched its Bitcoin-powered cross-border payments tool in the Philippines. (Coins2Day) 

A bipartisan group of U.S. Senators pressed the crypto bank Silvergate on FTX’s alleged misuse of customer funds. (Bloomberg) 

An independent examiner found that the bankrupt lender Celsius used customer funds to inflate the price of its own token. (Financial Times) 

Dogecoin  superfans pushed the memecoin to a two-month high after Elon Musk said he was considering crypto tools for Twitter. (Coins2Day) 

Britain’s finance minister is planning “robust” regulations for the crypto industry. (Reuters) 

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