Fed Policy Gives Big Banks a Crypto Edge, Warns CEO of Custodia Bank

Caitlin Long, the founder and CEO of Custodia Bank, recently shared sharp observations about the Federal Reserve's stance on cryptocurrency regulation.

Caitlin Long, founder and CEO of Custodia Bank, has slammed the Federal Reserve for its lingering anti-crypto stance and the structural advantage it gives to big banks, particularly in the emerging stablecoin landscape.

In a detailed Twitter thread, Long explains how the Biden administration, in coordination with the Fed, had announced several statements targeting crypto on January 27, 2023.

Of the five issued regulations, four have since been rescinded, leaving only one still in place. The fact that this particular guidance is being kept while others are revoked highlights a broader narrative, Long says.

The remaining policy, issued by the Fed, prevents banks from having direct exposure to cryptocurrencies or engaging in crypto custody services. It also favors permissioned (i.e., controlled by a select group) stablecoins over broader decentralized innovation.

This preference is not shared by other federal banking agencies, such as the OCC and FDIC, both of which have already rescinded their similar positions. In contrast, the Fed maintains this regulatory bias.

“This is the essence of the Fed’s policy: It supports permissioned (read: big bank-led) stablecoins and not broader decentralized innovation, which is the domain of startups and smaller institutions,” Long explains.

Moreover, a stablecoin bill is currently being deliberated by Congress, and it would effectively overturn the Fed’s favoritism for permissioned blockchains.

However, until this legislation is passed, big banks are given a critical early-mover advantage with their private stablecoins, positioning them strongly before the broader stablecoin market opens up.

“Congress should hurry up!” Long adds.

Beyond stablecoins, the Fed’s retained policies on crypto custody are also creating practical difficulties for banks.

“The Fed is making it difficult for banks to provide digital asset custody services by keeping in place a policy that was announced in January 2023 to the effect that banks can’t have direct exposure to crypto assets,” Long explains.

This stance contrasts with that of the SEC, which permits institutions to hold cryptocurrencies in a custodial capacity.

“If a bank applies for a crypto custody license from state banking regulators, they are told that they can’t also provide banking services for crypto companies because the Fed doesn’t allow it,” Long adds.

Thus, by blocking direct crypto exposure, the Fed is quietly discouraging banks from entering the digital asset custody market.

In Long’s view, the Fed’s current position serves two purposes: It attempts to stall the broader adoption of crypto technologies and favors traditional banking institutions in the emerging Web3 landscape.

“The Fed is trying to slow down crypto adoption and is making it harder for startups to build new technologies. They are also trying to help big banks get a head start in areas like stablecoins,” she concludes.