Why customers prefer to deal with a real bank

Why customers prefer to deal with a real bank

Custodia has all the benefits of being a bank with expertise in digital assets — plus, as a depository institution, we’re eligible to connect directly with the Federal Reserve payment system*, removing middlemen and layers of fees. In particular:

  • U.S. banks with direct access to the Federal Reserve via a master account can directly clear payments for their customers at the Federal Reserve, reducing the cost, delays, reconciliation headaches and counterparty risk involved with traditional intermediaries.
  • Banks are defined as “qualified custodians” under the Investment Advisers Act and the SEC’s Custody Rule.
  • Banks are defined as a “good control location” under the SEC’s Customer Protection Rule.

For the digital asset industry specifically, Custodia is designed to provide real-time settlement finality for U.S. dollar payments in digital asset transactions. Our digital asset competitors rely on other clearing banks to facilitate fiat transactions. This practice increases both counterparty credit risk and settlement delays. As a result, without direct access to U.S. dollar clearing, our competitors cannot execute on a settlement risk-free basis between a digital asset and fiat currency. Custodia aims to fill this critical gap.

* Custodia submitted an application for a Federal Reserve master account in October 2020, and it remains pending.

Wyoming and the Digital Asset Frontier

Wyoming law provides Custodia’s customers with clear legal title to their digital assets. The state’s property rights-oriented approach to digital asset laws makes Wyoming a customer-friendly jurisdiction for digital asset market participants.

In 2019, the Wyoming Legislature enacted HB 74, which authorized the chartering of special purpose depository institutions (SPDIs). These institutions are banks that receive deposits and conduct other incidental activities, including fiduciary asset management, custody, and related activities, but cannot lend customer fiat deposits and must instead hold these customer fiat deposits 100% in reserve.

As a Wyoming SPDI, Custodia is subject to Wyoming’s customer–friendly bailment laws, which are designed to ensure that legal title to a digital asset remains with the customer and not their custodian. In other words, similar to a coat check or valet parking, customer assets belong to the customer and are legally segregated from the other assets of the institution. Moreover, in contrast to traditional custody arrangements, this legal segregation is protected by statute instead of merely by a contract that could be broken in a trust company’s bankruptcy. Bailment is designed to provide a bankruptcy-remote and off-balance-sheet status for customer digital assets.