Lindholm Says Wyoming Should Sue Federal Reserve Over Digital Bank Rejection

Now that the Federal Reserve has shut a Wyoming Special Purpose Depository Institution out of its centralized systems, Tyler Lindholm who helped write Wyomings digital asset laws, said it's time for the state to sue the Federal Reserve.

Renée Jean

February 02, 20238 min read

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(Cowboy State Daily Staff)

Now that the Federal Reserve has shut a Wyoming Special Purpose Depository Institution out of its centralized systems, a former lawmaker who helped write Wyoming’s digital asset laws, tells Cowboy State Daily it might be time for the state to sue the Federal Reserve.

Tyler Lindholm, former co-chair of the Wyoming Blockchain Task Force, recalled that when Wyoming wrote its SPDI law, it removed a line that directed the Wyoming attorney general to step in if federal agencies don’t play fair with the state’s SPDIs, commonly referred to as “speedies.”

“We took that out of the law at the request of the Kansas City Federal Reserve Bank,” Lindholm told Cowboy State Daily on Wednesday. “They were not comfortable with that language, so we took it out. And I think it might be time that the Legislature put it back in.”

Even without that language, Lindholm believes Wyoming probably already has enough standing to pursue a lawsuit against the Fed, if Attorney General Bridgett Hill wants to.

The move by the Federal Reserve “is very damaging to Wyoming’s reputation,” he said. “It’s damaging to the Wyoming Division of Banking’s reputation. And we know that Wyoming banks are solid.

“If you go through a Wyoming chartering process, your chances of liquidity are pretty high. All of a sudden, that’s being called into question. I’m not an attorney, but I think that provides standing.”

Fed Cites Money Laundering, Terrorism As Concerns

In denying Custodia Bank’s application for a master account, the Kansas City Federal Reserve said the small Wyoming bank’s “novel business model and proposed focus on crypto assets presented significant safety and soundness risks.”

The agency also says that it’s “novel and untested crypto activities that include issuing a crypto asset on public, and/or decentralized networks” also didn’t include a “sufficient framework to prevent money laundering or terrorism financing risks.”

But that’s not true, said Custodia CEO Caitlin Long. 

In fact, Custodia Bank was chartered as a state bank, which means it must follow all the same regulations as any other state bank. This includes know-your-customer rules aimed at preventing money laundering or terrorism financing. 

“Custodia offered a safe, federally regulated, solvent alternative to the reckless speculators and grifters of crypto that penetrated the U.S. banking system, with disastrous results for some banks,” Long said. “Custodia actively sought federal regulation, going above and beyond all requirements that apply to traditional banks.”

Long also said Custodia will continue to pursue its lawsuit against the Federal Reserve.

State Needs To ‘Pursue Legal Avenues’

Sen. Chris Rothfuss, D-Laramie, told Cowboy State Daily that putting a directive for the state’s attorney general to pursue legal action on behalf of Wyoming’s SPDIs back into the law would be a topic for the interim session.

In the meantime, he hopes the Fed’s decision will “intensify efforts on behalf of the state of Wyoming to pursue legal avenues to support lawsuits and legal actions that are already in play.”

“It’s absurd that we lost this, and really I’m disappointed,” Rothfuss added. “So that’s incumbent on the governor and the Attorney General’s office to really step up.”

Another key issue the select committee will likely take up during the interim are any measures that remain within the state’s rights to help Wyoming SPDIs.

“Anything else we can do to give them more tools in the toolbox to make up for this lost access to the Federal Reserve,” Rothfuss said. “So, we’ll work on that during the interim.”

No True Independence

Both Rothfuss and Lindholm question the Federal Reserve’s independence from the executive branch of the federal government, pointing out that the decision to reject Custodia’s master account application came within two hours of an anti-crypto statement from the White House.

“The Federal Reserve is supposed to be an independent entity operating independent form the executive branch,” Rothfuss said. “It seems a little bit coincidental that all of these decisions were related within a couple of hours of each other, after years of waiting for any type of response or guidance.”

The Federal Reserve has not been a constructive partner, Rothfuss added.

“They have not provided any opportunities for us to really weigh in on this and work this them,” he said. “And that’s disappointing.”

Picking Winners

In her lawsuit against the Federal Reserve, Long has filed a brief accusing the Fed of playing favorites based on its approval of a proposal from BNY Mellon to handle digital assets.

She sees that setting up one set of easier rules for traditional Wall Street banks and another, unachievable set for Wyoming’s SPDIs.

She also has suggested it’s just not fair to allow traditional Wall Street Banks to catch up with the innovators in the sector like Custodia, which has been working in the sector for a much longer period of time and has already been waiting nearly three years for a response from the Fed on its application. 

What’s interesting there, Lindholm said, is that while Custodia is 100% reserved and cannot use customer assets for their own investments, “BNY Mellon has made no such promise.”

Digital assets don’t have a lender of last resort, Lindholm added. And, as the world has seen with FTX, that really matters.

Yet, he said that, “The Federal Reserve didn’t flinch when Sam Bankman-Fried bought 83 percent of a bank with a master account status. I think there’s something to be said there, and there’s something that should be looked at very closely, considering the implications that … Fried was a major donor to a lot of politicians on the Hill.”

Little Bank That Could

Lindholm believes the Fed’s rejection of Custodia’s application is meant to put a chilling effect on the Wyoming SPDI’s lawsuit. But he hopes it continues to push the case.

“No other case against the Federal Reserve has made it past the dismissal stage,” Lindholm said. “And it’s a small bank in Wyoming that was chartered right here that did make it past.

“In the entire 120 years of history of the Federal Reserve, nobody’s ever taken them to the ropes quite like Custodia has, and so I think that shows a lot about our Wyoming companies.”

Federal laws, meanwhile, say that if a state charters a bank, that’s supposed to be good enough for the Fed. 

“That’s what the Federal Reserve Act says on its face. And you know, the Federal Reserve is not compliant, or at least it appears that they’re not compliant, with their own language that’s in federal law,” he said. “So it’s wild.”

Lindholm said he hopes the Wyoming Select Committee takes that into consideration during its deliberations on the matter.

“They’ve got a company out there on the ropes trying to live by the letter of the law here in the state of Wyoming, and they’re not seeing a warm welcome at the federal level, and maybe Wyoming should step in,” he said.

The economic opportunity, he believes, is out there and quite large. But it’s all waiting on clearing federal regulatory hurdles.

“We’ve had a lot of outreach, not just in my time with Sen. (Cynthia) Lummis’ office, but before,” he said. “There was a lot of outreach from some very big organizations that looked at Wyoming.

“I think there’s a lot of folks just waiting for that opportunity. The problem we’ve got is the Federal Reserve and some of their, it appears to be, ignorance of their own law.”

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Renée Jean

Business and Tourism Reporter