Feds Crack Down on Crypto Industry

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Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz provides insider insight into politics and regulation.

The crypto industry has started the year with a few victories under its belt, with Republican allies taking control of key House committees on a surprising rise in the price of Bitcoin. It’s also been 12 full days since a major company declared bankruptcy, which ranks well in the category of positive developments.

This streak ended last Friday with two (seemingly) unrelated government actions: the White House released a roadmap to mitigate the risks posed by crypto, and the Federal Reserve denied Custodia membership application, a bank of digital assets.

While both measures may appear to be red tape, they reflect a tougher stance by the federal government towards a crypton outcome that should have been expected given the wreckage left by the industry in the course of the last few months.

The Custodia decision sends a signal that the Federal Reserve is not awarding companies any points for following the rules. Led by industry veteran Caitlin Long, Custodia has followed the proper paths to become a Special Purpose Depository Institution in Wyoming, which, among other stipulations, means it cannot lend money and must hold a liquid medium for all its deposits.

The crypto industry is currently undergoing a banking crisis as players like Silvergate and Signature haemorrhage money. In an interview with Fortune, Long argued that Custodias’ unique structure would provide stability and prevent bank runs, which is not guaranteed by the options currently available. she said regulators are lucky the FTX implosion happened as soon as it did.

It’s important to have a secure and strong connection between the traditional financial system and the digital asset financial system, she told Fortune.

In Friday’s statement, White House officials made it clear that they believe the two can remain separate, writing that any new legislation from Congress should not allow traditional institutions such as pension funds or, presumably, the banking system to plunge headlong into the cryptocurrency markets.

For those who matter back home, the Federal Reserve and the White House apparently operate independently of each other. That the two intertwined actions took place 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 an ongoing lawsuit against the Federal Reserve of Kansas City over a different app to work with a primary account, which would allow it to access Fed payment services, including money transfers between banks. . Custodia blamed the Washington, D.C. Board of Governors for slowing enforcement behind the scenes, a charge the judge handling the case called plausible in November.

The relationship between the White House and the Federal Reserve could tighten further, as Biden’s top adviser, Brian Deese, who helped draft Friday’s crypto roadmap, prepares to leave his post on the National Economic Council.

Rumored to be a favorite? One of the most outspoken voices at the Federal Reserve on the threat of cryptos to traditional finance is Vice Chairman Lael Brainard.

Custodia’s setback is likely a sign of austere times ahead for the crypto industry.

Leo [email protected]@leomschwartz

DECENTRALIZED NEWS

Strike launched its Bitcoin-powered cross-border payment tool in the Philippines. (Fortune)

A bipartisan group of US senators has lobbied crypto bank Silvergate over FTX’s alleged misuse of client funds. (Bloomberg)

An independent reviewer has found that bankrupt lender Celsius used customer funds to inflate the price of its own token. (FinancialTimes)

Dogecoinsuperfans pushed memecoin to a two-month high after Elon Musk said he was considering encryption tools for Twitter. (Fortune)

UK Finance Minister plans ‘strong’ regulation for the crypto industry. (Reuters)

EVEN OF THE MOMENT

The legend of Big Short spoke:

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