As cryptocurrencies become knit into the fabric of global finance, there’s an urgent need for banks that can handle both digital and traditional assets in a safe, sound, and secure manner. Wyoming led the nation in creating a regulatory framework that allows Special Purpose Depository Institutions (SPDIs) to serve precisely that need.
Many in Washington, D.C. and elsewhere are wrestling with what this all means – and importantly, how best to provide appropriate oversight. There’s growing recognition that policymakers can’t just sit on their hands as digital assets grow in importance and adoption. However, some of the fundamentals around cryptocurrency and digital asset banking remain deeply misunderstood.
As one of the first institutions in the country to successfully obtain a charter under the SPDI framework, Custodia will clear up any lingering confusion around SPDIs and the statutes and regulations under which they operate.
Here are the facts:
SPDIs are sometimes described as “bank-like” or “bank-lite.” Not the case. SPDIs are banks under state and federal law. The SPDI charter is a bank charter – specifically, a depository institution, which is a distinction that unlocks certain regulatory benefits and obligations.
What’s more, the Federal Reserve Bank of Kansas City acknowledged Custodia’s status as a depository institution. So did the American Bankers Association (ABA) – in fact, Custodia received its ABA routing number earlier this year, a critical step achieved only once the ABA and a Federal Reserve Bank confirm an applicant’s eligibility – as a depository institution.
The Federal Reserve has proposed a process to weigh how it might fold SPDIs and similar institutions into the existing Federal Reserve payment system. Custodia has publicly expressed its support for regulation in various forms, including its comment letter to the Federal Reserve in connection with its Proposed Guidelines for Evaluating Account and Services Requests.
Amid stereotypes suggesting all cryptocurrency or fintech is awash with speculation and risk-taking – some of which is accurate – SPDIs stand out: SPDIs are at their foundation a secure, stable, regulatory-compliant bridge between digital assets and the U.S. dollar payment system. We are subject to the same capital requirements as traditional banks, with Wyoming’s banking laws, rules and regulations for SPDI charters holding us to Tier 1 capital requirements identical to federal standards for conventional banks – but holding us to far greater standards for digital asset custody. SPDIs are not only held to the same rules binding traditional banks that require prompt corrective action should they show indicators of weakness, but are also required to have “living wills” (just like America’s biggest banks have, but the vast majority of banks do not).
Custodia goes even further, because it is subject to both Wyoming law and Federal Reserve membership requirements. This means Custodia will be required to hold a minimum of $1.08 in cash and short-term high-quality liquid assets such as T-Bills to back each $1.00 of customer deposits during its first three years as a Fed member bank.
Unlike traditional banks, SPDIs will not take either credit risk or interest-rate risk with customer deposits. Betting their customers’ money on shoddy assets is how banks fail. With SPDIs, this is a structural impossibility. For all these reasons, SPDIs are in fact far less risky than traditional fractionally reserved banks.
It’s convenient shorthand for SPDIs, and we may even be guilty of using the phrase ourselves from time to time. But some bad-faith actors have muddied the waters by suggesting or implying that, as “crypto banks,” SPDIs will engage in practices that we in fact will not and cannot.
We do not, for instance, take cryptocurrency deposits on our balance sheets. We are prohibited by state and federal law from doing so, and the misperception that we have any plans to do so fundamentally misunderstands the SPDI model. In fact, Custodia intends to provide custody services for digital assets, just as a securities custodian does for securities.
Custodia, along with our partners and peers, are thrilled to be building something that can solve a central dilemma facing the digital asset industry — namely, how to fit together this dynamic space that moves at lightning speed with the tested regulatory framework covering U.S. banks. But to get it right, the industry, Washington and statehouses around the country need a shared understanding rooted in a common set of facts. As those committed to regulatory compliance and permission-not-forgiveness at the heart of our work, we’re pleased and honored to share what we know to be true.