US Fed denies Custodia Bank membership over crypto concerns

In its 86-page report released on March 24, the US Federal Reserve denied Custodia Bank’s application for membership citing concerns over the bank’s involvement in the crypto industry. The Fed has raised “concerns about banks with business plans focused on a narrow sector of the economy”, with a high concentration of activities related to the crypto industry. The report states that “Those concerns are further elevated with respect to Custodia because it is an uninsured depository institution seeking to focus almost exclusively on offering products and services related to the crypto-asset sector, which presents heightened illicit finance and safety and soundness risks.”

The Fed also noted that Custodia Bank had not yet developed a sufficient risk-management framework for its proposed cryptoasset-related activities, nor had it addressed the highly correlated risks associated with its undiversified business model. The report stated that Fed’s members must align their risk management systems and controls with the activities described in their business plans.

If Custodia Bank were to be accepted as a member of the System, it would be further prohibited from running crypto-related services “given the speculative and volatile nature of the crypto-asset ecosystem” that is not consistent with the purposes of the Federal Reserve Act. The report stated that “Further, if the Board were to approve Custodia’s membership application, it would prohibit Custodia from engaging in a number of the novel and unprecedented activities it proposes to conduct—at least until such time as the activities conducted as principal are permissible for national banks.”

In response, Custodia Bank criticized the Fed’s decision as shortsighted and an inability to adapt to changing markets. The bank claimed that perhaps more attention to areas of real risk would have prevented the bank closures that Custodia was created to avoid. The bank has vowed to turn to the courts to vindicate its rights and compel the Fed to comply with the law.

The Fed’s report on Custodia Bank’s membership application is 14 times longer than its previous longest denial order, and 41% longer than the Fed’s longest order on any subject, according to the bank. In late January, the Fed denied a membership request from Custodia Bank, as well as a second application in February, claiming that its application “was inconsistent with the required factors under the law.”

In conclusion, the US Federal Reserve has denied Custodia Bank’s membership application due to concerns over the bank’s involvement in the crypto industry. The bank’s proposed cryptoasset-related activities were deemed to present heightened illicit finance and safety and soundness risks, and the bank had not developed a sufficient risk-management framework. While Custodia Bank has criticized the Fed’s decision, the bank is now prohibited from running crypto-related services if accepted as a member.


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Galaxy Digital CEO Says Powell’s 2nd-Term at US Fed Reserve Could Hurt Crypto Market

Billionaire investor Mike Novogratz is concerned that Jerome Powell’s renomination for a second term as the Federal Reserve chairman could slow down the growth of the cryptocurrency market. - 2021-11-26T172148.075.jpg

The founder and CEO of Galaxy Investment Partners’ revelations come as an overall investor and not as a Bitcoiner.

Speaking in an interview with CNBC’s “Crypto Night in America” on November 24, Novogratz said that after Powell’s reappointment, the “macro story has changed a little bit” and that “people are getting pretty bearish” on crypto assets.

Cryptocurrency prices are down following Powell’s nomination to lead the Fed next year and Novogratz believes that his appointment could disrupt crypto prices even further.

Novogratz explained that Powell recently got reappointed and that may allow him to act more like a central banker than a person who does not want to be reappointed.

The appointment could mean a significant change to the US monetary expansion policy, cryptocurrency regulation, and US digital currency agenda.

Novogratz sees that with the appointment, Powell is likely to move faster to raise interest rates and tighten policy than his previous leadership working as Fed chair.

“We have inflation showing up in pretty bad ways in the US. So, we can see the Fed is going to have to move a little faster … That would slow all assets down. It would slow the Nasdaq down. It would slow crypto down if we have to start raising rates much faster than we thought,” Novogratz elaborated.

But now the Fed is grappling with the highest inflation in 31 years. It has already trimmed the rate at which it is buying bonds. Minutes from its last monetary policy decision, released on Wednesday showed that officials are open to dealing down quantitative easing even faster. 

According to CME group’s FedWatch tool, the financial markets show investors now think that the Federal Reserve could increase interest rates in the second half of the next year.

Bitcoin and other cryptocurrencies are among many assets that have been lifted by the flood of money from the Fed in the last year and a half.

In the past, Novogratz predicted that Bitcoin would hit $100,000 by the end of this year, but now he said that looks unlikely. According to CoinMarketCap, Bitcoin was down 2.26% on Thursday to $57,356.63.

What Does This Mean for Crypto Markets?

As reported by Blockchain.News on November 22, President Joe Biden reappointed Republican Federal Reserve chairman Jerome Powell for a second four-year term. The battled-tested centrist leader enjoys strong bipartisan support and has helped lift the US economy out of the Coronavirus recession. 

Powell has overseen the biggest monetary stimulus in US history to assist the economy to cope with the Covid-19 pandemic.

Biden also appointed Democratic Fed Governor Lael Brainard as vice-chairperson for the Fed’s Board of Governors, succeeding republican Richard Clarida.

The decision closes a weeks-long race between Powell and Brainard for the country’s top economist post. Biden reportedly considered Brainard more seriously in recent days under pressure from progressive Democrats after Powel initially seemed assured of his position. Brainard has taken a tougher stance than Powell on banking regulations.

President Biden said that with massive uncertainty facing the US economy, the country needed stability at the Federal Reserve. The president stated that Powell has provided the stability that is valuable in the Fed chair.

Although investors value the stability Powell brings, chances are that he may raise interest rates more quickly than Brainard and that could hurt technology and communication stocks and even crypto markets

The impact of rising interest rates may reduce investments in speculative assets such as cryptocurrencies. Since Bitcoin does not provide investors with interest payments, rising interest rates could make a digital currency less appealing to market participants. Bitcoin’s supply changes very gradually, and therefore any reduction in demand could prove bearish for prices.

Image source: Shutterstock


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Paul Tudor Jones Sends Inflation Warning to Feds, Touting Bitcoin as Way to “Hedge”

Paul Tudor Jones described Bitcoin as one of the best ways of protecting his wealth over the long run, and he uses it to hedge his portfolio, comparing it to gold.

In an interview with CNBC’s “Squawk Box” Monday, Jones discussed the inflation issue and stated how the U.S. Federal Reserve handles the current monetary situation.

Ahead of the Fed’s highly awaited policy decision this week, Jones stated that he is afraid of the central bank, which is not moving quickly enough to resolve the inflation problem.

The hedge fund manager warned the central bank about its insistence that recent price spikes are only temporary as something insincere. Jones, therefore, told investors to double down on defensive investments such as commodities, cash and even violative Bitcoin.

He said that “Things are absolute bat-sh*t crazy right now,” describing the Fed’s coming Wednesday meeting as the most significant of the past five years because of inflation data showing the biggest price spikes in 13 years for two months in a row.

Meanwhile, Jones revealed that he now wants an allocation to Bitcoin of 5% in his portfolio.

“The only thing I know for sure is I want to have 5% in gold, 5% in bitcoin, 5% in cash and 5% in commodities,” Tudor Jones said. Talking about the common inflation hedges, he said he would allocate the rest (other 80%) of his portfolio depending on how the Fed will shift its policy to help ease price gains.

Last year, Jones revealed that his firm invested between 1% and 2% of its assets in Bitcoin. With assets under management at $44.6 billion, Tudor Investment Corporation’s company secured custodial ties with institutional crypto powerhouses Bakkt and Coinbase.

Institutional Investments in Bitcoin 

Bitcoin cryptocurrency is gaining momentum as an inflation hedge among institutional investors. In May 2020, legendary trader Paul Tudor Jones bought Bitcoin as an inflation hedge as central banks worldwide printed money to relieve economies adversely affected by the ongoing Covid-19 pandemic.

During that time, Jones said that Bitcoin reminded him of Gold in the 1970s, when he announced his latest strategy shift to investors. His firm, Tudor Investment Corporation, invested part of its capital in Bitcoin futures.

An increasing number of institutional investors continue to invest in Bitcoin as part of their capital allocation. The entry of big names like Tesla has led several conservative institutions to shed their inhibition of the cryptocurrency. Seeing the benefits that large institutional investors are reaping by investing in Bitcoin, retail investors are also entering the crypto space.

Image source: Shutterstock


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Bitcoin is More of a Gold Substitute than the Dollar, Fed Chair Powell Says

The Chair of the US Federal Reserve argues that while Bitcoin (BTC) is too volatile to be considered money and is “backed by nothing,” it could be a substitute for gold. He also recently made a statement on Bitcoin, which has affected the asset’s price seeing it drop by $1,000.

Powell’s View on Cryptocurrencies

In response to a cryptocurrency question, Jerome Powell gave frank comments at an event hosted by the Bank for International Settlements, or BIS, on Monday.

Asked if Bitcoin and other cryptocurrencies posed a threat to financial stability, Powell made known arguments that have long been based on legacy finance figures.

He argued that crypto assets, such as Bitcoin, are highly volatile and therefore not usable as a value store and are not backed by anything. They are more of speculative assets and are therefore not primarily used as a payment method. He then concluded that it is simply a substitute for gold, not the regular dollar.

Words from Powell provide some of the Fed’s most direct views about Bitcoin in recent times to go public and build on a perspective offered in 2019. Weeks ago, Treasury Secretary Janet Yellen also made clear her concerns about decentralized cryptocurrencies.

Powell, like Yellen, seemed to spark an explosion of negative market feeling, and following his answer, BTC/USD fell almost 1000 dollars. However, Powell’s foremost proponents agree on the cryptocurrency status as a new gold for all their disagreements.

The decision could hit hard for Bitcoin-hostile gold bugs, particularly Peter Schiff, who keeps claiming that fate is on his side regarding generational store value.

One of the concerns Powell raised is that American citizens would hold digital dollar during any crisis, which will lead to the failure of potential banks. “The only way we can reap the potential benefits while also handling the potential risks is to think tremendously,” said Powell.

The Stablecoin Issue

Switching to stablecoins, Augustin Carstens, General Manager of BIS, claimed stablecoins import value from sovereign currencies. Together with  Powell and Jens Weidmann, President of the German Federal Bank, he examined the stepped-up trend of central bank digital currencies, the CBDCs, with stablecoins.

The discussion was less unusual here, with the speakers reiterating known positions concerning the separation between private stablecoins and bank-operated CBDCs.

Meantime, Powell said stablecoins increase the credibility of cryptocurrencies based on sovereign money.

He mentioned that stablecoins could play a role in regulating, but that role is not to form a new global monetary system. Private stablecoins would not be a suitable replacement for a sound central bank money financial system.

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