BPInsights: June 11, 2022

Stories Driving the Week

Fintech Pursuit of Fed Payments Pipeline Comes to Court, Congress

Custodia Bank, a Wyoming “crypto bank” formerly called Avanti, sued the Federal Reserve this week. The lawsuit accuses the central bank of unlawfully delaying a decision on the crypto bank’s application for a Fed master account, a coveted tool that offers access to the Fed’s payments system. Among other claims, Custodia asserts that the Federal Reserve’s delay and the lack of any “discernable standards” or “intelligible principles” for making account opening determinations violate the due process clause of the Constitution.

  • Crypto bill: A crypto bill introduced this week by Sens. Gillibrand (D-NY) and Lummis (R-WY) contains a provision that could enable nonbanks, including fintech and crypto firms, to access Fed accounts. The language appears to abrogate the Federal Reserve’s authority to determine which firms are fit to receive account access. “This would make getting a Fed account a right, essentially, whereas the Fed has long held the position that it is discretionary for the Fed to grant access to an applicant that applies for services and a master account,” BPI’s Paige Pidano Paridon said in American Banker. “The legislation doesn’t appear to provide any framework for or speak to any ability of the Fed or the reserve banks to impose requirements or conditions on access.”

    Other highlights of the bill, according to Bloomberg, include reserve requirements for stablecoin issuers; a directive to Treasury to clarify stablecoin issuers’ responsibility to comply with sanctions; a requirement for federal regulators to analyze and report on energy consumption in the digital asset market; and more authority for the CFTC to regulate coins categorized as commodities.
  • Reserve Trust: Meanwhile, the Kansas City Fed revoked the master account of the fintech firm Reserve Trust, according to Senate Banking Committee Ranking Member Pat Toomey (R-PA), who wrote a letter to the Kansas City Fed asking for more details on its decision to terminate the account. During Sarah Bloom Raskin’s consideration for the Fed’s vice chair for supervision position, Senate Republicans had questioned whether she helped the fintech secure a master account. “This development heightens the significant concerns already surrounding the fairness, transparency, and consistency of the Federal Reserve System’s approach to master account applications,” Toomey wrote in the letter this week.

To learn more about Fed master accounts, see the following links:

The Crypto Ledger

TerraUSD’s plunge was quick, but its fallout ripples slowly: South Korean police are investigating allegations that staff at Terraform Labs, the company behind the TerraUSD stablecoin, embezzled Bitcoin from a cache of cryptocurrency meant to support the stablecoin’s dollar peg. Because of DeFi’s opacity, investors are still uncertain about the exact source of the run on TerraUSD. The SEC is also investigating whether marketing of TerraUSD violated investor-protection rules and whether Terraform Labs broke rules for securities and investment products, according to Bloomberg.

  • Hacker hub: Reuters this week published an investigative piece on how crypto exchange Binance “became a hub for hackers, fraudsters and drug traffickers.”
  • ‘The Big Scam’: The scale and influence of crypto coupled with its lack of legitimate use cases suggests it may be a “big scam,” New York Times opinion writer Paul Krugman wrote in a recent column.
  • Putting a number on it: Americans have lost more than $1 billion to crypto scams since the beginning of last year, according to a Federal Trade Commission analysis cited by the Washington Post. Nearly $4 out of every $10 reported lost to fraud originating on social media was lost in crypto, more than any other payment method, the analysis reported.
  • NY stablecoin guidance: The New York State Department of Financial Services this week issued new regulatory guidance for U.S.-dollar-backed stablecoin issuers under its purview. The guidance requires that the stablecoins be fully backed by “a Reserve of assets, meaning that the market value of the Reserve is at least equal to the nominal value of all outstanding units of the stablecoin as of the end of each business day.” Assets considered “reserves,” such as U.S. Treasury bills, are listed in the guidance. The stablecoin issuer must also have clear policies on redeeming coins and undergo monthly independent audits of its reserves.

Barr Advanced by Senate Banking Committee

Michael Barr, the nominee for Fed vice chair for supervision, was approved this week in a bipartisan vote by the Senate Banking Committee. Five Republicans, including Sen. Pat Toomey (R-PA), the panel’s ranking member, supported Barr. Barr’s nomination now heads to the Senate floor.

What’s New in CBDC 

CBDC risks being an “expensive failure,” the Center for European Reform, a think tank, said in a report cited by Bloomberg. Instead, Europe could use regulation to make payments cheaper and more competitive, the report said.

  • Digital euro soon? Not so fast: A digital euro will likely take longer to roll out than the end of 2025 timeframe that the European Central Bank has suggested, according to Dutch central bank official Inge van Dijk in POLITICO.
  • Bankers should ‘dread’ CBDC: The advent of a CBDC represents an “existential threat” to banking that warrants urgent attention, Rob Blackwell wrote in an American Banker op-ed this week, citing the potential for CBDC to siphon deposits from the banking system and decrease availability of credit.

Liquidity Slump Raises Alarms

Liquidity across U.S. markets has deteriorated to its worst level since the early days of the pandemic in 2020, according to the Financial Times this week. Liquidity strains in Treasury and commodities markets have raised concerns among Federal Reserve officials, according to the article, which cites the central bank’s latest meeting minutes. The article notes that post-crisis capital regulations have led to a decrease in intermediation by primary dealers.

WSJ: How a D.C. Bureaucrat Amassed Power Over Businesses, Banks and Consumers

CFPB Director Rohit Chopra has exerted influence over a wide swath of federal regulatory policy, according to an article published this week in the Wall Street Journal profiling Chopra’s tenure. The article covers Chopra’s efforts at the CFPB, as well as the FTC and FDIC, to impose new restrictions on the financial services industry in areas from mergers to fees. “He is driving the Biden administration’s regulatory agenda in ways few would have imagined, given his title—building a sphere of influence that reaches nearly every U.S. business, bank and consumer,” reporters Ryan Tracy and Andrew Ackerman wrote in the piece. “Senate Republicans including Pennsylvania’s Pat Toomey say his actions reflect a runaway regulator who has eroded institutional norms designed to insulate regulation from partisan politics,” they wrote.

In Case You Missed It

Former Regulators Launch New Cravath D.C. Office

Law firm Cravath Swaine & Moore LLP will open a new D.C. office this fall headed by former FDIC Chairman Jelena McWilliams, former SEC Acting Chairman Elad Roisman and Jennifer S. Leete, a former senior SEC enforcement official. McWilliams will serve as managing partner.

Wells Fargo Gives $10M Grant to National Center for State Courts to Boost Housing Stability

The Wells Fargo Foundation gave a $10 million grant to the National Center for State Courts to strengthen eviction diversion efforts and promote housing stability, according to a recent announcement.

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The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.