US Regulators Aim to Debank Crypto

Several parties have submitted curiae briefs to the appellate court to support Custodia Bank’s approval for a master account from the Federal Reserve.

Donald Verrilli, the United States solicitor general from 2011 to 2016, has alleged in an appellate filing that federal regulators were undertaking “aggressive, coordinated efforts to ‘debunk’ the digital asset industry.”

In an amicus brief submitted to the U.S. Tenth Circuit Court of Appeals on July 3. In support of an appeal from Custodia Bank, Verrilli represented the Blockchain Association.

Custodia appealed to the Tenth Circuit in March, following a March decision in the U.S. District Court for the District of Wyoming, to prevent the Federal Reserve from denying the bank access to a master account.

Context of the case

In October 2020, Custodia applied for a master account and filed a lawsuit against the central bank in June 2022. The lawsuit was based on allegations that the Fed had engaged in an “unlawful delay” in processing the application.

In 2023, the Federal Reserve denied Custodia’s application, attributing its rejection to the bank’s involvement in the cryptocurrency industry. Custodia was denied the opportunity to have its application reviewed by a magistrate in March 2024, who endorsed the Federal Reserve’s decision.

“Unfortunately for Custodia, its application was entangled in the current of federal regulators’ aggressive, coordinated efforts to ‘debunk’ the digital asset industry,” stated Verrilli in the July 3 filing.

The former solicitor general, speaking on behalf of the Blockchain Association, cited statements from the Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency in January 2023 that asserted that crypto was “highly likely to be inconsistent with safe and sound banking practices.”

The Federal Reserve denied Custodia’s application for a master account following the coordinated statement from the federal regulators.

Verrilli included:

“Through no fault of its own, Custodia became the focus of federal banking regulators’ campaign to isolate the digital asset industry from the greater national economy.”

Other interested parties, such as former U.S. Senator Pat Toomey, Wyoming Secretary of State Chuck Gray, and U.S. Senate Banking Committee and U.S. House Financial Services Committee members, have submitted amicus briefs supporting Custodia’s appeal.

Another former U.S. Solicitor General, Paul Clement, submitted a brief for the Digital Chamber and Global Blockchain Business Council that asserted Custodia had fallen into “disfavor with federal regulators.”

It is still being determined when the appellate court will decide on the Custodia request. It is also probable that the justices will consider a Supreme Court opinion issued on June 28 that would overturn the Chevron doctrine in their decision.

The precedent requiring courts to defer to the interpretation of the law by federal agencies was overturned by a majority of justices in the highest court. This decision could potentially affect the Federal Reserve’s decision on Custodia’s application for a master account.

On July 10, the U.S. House of Representatives will reevaluate a resolution that seeks to repeal a Securities and Exchange Commission accounting rule that has impeded the use of cryptocurrency by banks.

President Joe Biden vetoed the legislation in May despite it initially passing in both the House and Senate. A two-thirds majority vote in the House is sufficient to override the veto.