Over the past century, the number of US banks has declined significantly, from 30,000 banks in 1921 to 4,997 US banks in 2021, according to Federal Reserve data. Recently, the US central bank denied Custodia Bank of Wyoming, a financial institution that takes $1.08 for every dollar deposited by customers. Although there seems to be a need for such a bank after the collapse of three major US banks, the Federal Reserve stated that board members have “greater concerns” about institutions with plans to focus solely on one sector. limited.
The Fed’s explanation of why it denied Custodia Bank highlights the adversity of the crypto-asset sector
Shortly before the collapse of Silvergate Bank, Silicon Valley Bank and Signature Bank, the Cheyenne, Wyoming-based financial institution, bank custody, he was denied membership in the Federal Reserve System. The Federal Reserve Board specified that Custody’s request was “inconsistent with the factors required by law.” This week, the Fed published its explanation of why it rejected the Wyoming bank. Custody would differ from the many banks currently in operation in that it maintains a full reserve and more to cover deposits.
TO statement de Custody published on March 24 highlighted the need for a bank to operate in this way, after the collapse of several banks. “The historic bank runs in the past two weeks underscore the dire need for fully solvent banks that are equipped to serve rapidly changing industries in an age of rapidly improving technology,” the company stated. “That is the exact model proposed by Custodia Bank: keep $1.08 in cash to support every dollar deposited by clients. Unfortunately, the Federal Reserve did not pay enough attention and allowed the risks of bank runs to accumulate in conventional banks.
the federal reserve fixed in its decision that it had “fundamental concerns” about the Custody app, including its “unprecedented and novel features.” One problem the Fed has with the Custody business model is its focus on narrow banking and servicing crypto clients. “Overall, the board has raised concerns about banks with business plans focused on a narrow sector of the economy,” the US central bank board stated. “Those concerns are further raised with respect to Custody because it is an uninsured depository institution that intends to focus almost exclusively on offering products and services related to the crypto-asset sector, raising increased concerns about illicit finance and security and soundness risks.”
Could narrow banking pose a threat to the current fractional reserve model?
Narrow banking is a system that restricts lending activities to safe, low-risk investments only and maintains a 100% reserve requirement against these investments. It is sometimes called “100% reserve banking.” However, as Bitcoin.com News reported in another article on fractional reserve banking, restricted banking is not a widespread practice these days, especially among the 4,997 banks in the United States. The United States has not seen many strict banking practices since the suffolk systema method developed by a group of New England-based banks in the early 19th century.
During the Suffolk System, member banks had to hold 100% of their deposits in reserve with Suffolk member banks, which issued a common currency that could be used by the customers of any participating bank. Despite its success in stabilizing the New England banking system, the Suffolk System was eventually superseded by fractional reserve banking. It is also believed that the system worked in a similar way to today’s central banks, as it A study indicates that “private commercial banking also provided some services that central banks provide today.”
The International Monetary Fund (IMF) has published a paper on narrow banking, but the author of the report says that “the economic costs of narrow banking could be particularly significant in developing countries.” He IMF report it also suggests that a central banking model would be a better alternative. The US Federal Reserve has been lobbying against narrow banking for quite some time, even before the Custody denial. A editorial published by klgates.com in 2019 detailed how “the Board of Governors of the Federal Reserve System recently took steps to maintain the status quo.”
The article noted that on March 12, 2019, the US central bank issued an Advance Notice of Proposed Rulemaking (ANPR) for Regulation D. The authors, Stanley Ragalevsky and Robert Tammero Jr., detailed that the ANPR of the Fed came in around the same time as the Federal Reserve Bank of New York won a lawsuit against the financial institution TNB USA. The “non-banking” BTN defendant the Federal Reserve in 2012 for its application to become a restricted bank in 2010.
At the time, TNB claimed that the Fed’s delay was motivated by pressure from traditional banks that saw TNB’s narrow banking model as a competitive threat. TNB’s argument may be the crux of the matter, as the current modern banking model is based entirely on the fractional reserve model. At a time when banks are failing, a narrow bank or 100% reserve-based financial institution model could be very popular.
It could also encourage other banks to follow the trend, as outlier banks that copied member banks within the Suffolk System in the early 19th century benefited from the idea of full reserve banking. The arguments against the Suffolk System suggest that the bank was trying to establish a monopoly. However, with the number of banks declining by 83.34% in the last 100 years from 30,000 to 4,997, it could be argued that there is a monopoly on free banking practices.
Meanwhile, Custodia says it will take its issues with the US central bank to court. “The recently released Fed order is the result of numerous procedural anomalies, factual inaccuracies that the Fed refused to correct, and a general bias against digital assets,” Custodia explained in a statement on Friday. “The recently released Fed order is the result of numerous procedural abnormalities, factual inaccuracies that the Fed refused to correct, and a general bias against digital assets,” Custodia said. “Instead of choosing to work with a bank that uses a fully secretive, low-risk business model, the Fed demonstrated its myopia and inability to adapt to changing markets.”
Custodian added:
Perhaps more attention to real risk areas would have prevented the bank closures for which Custodia was created. It is a shame that Custodia has to go to court to assert its rights and force the Fed to comply with the law.
What do you think about the Federal Reserve’s stance towards the crypto-asset sector and restricted banking methods? Share your thoughts in the comments section below.
image credits: Shutterstock, Pixabay, Wiki Commons
Disclaimer: This article is for informational purposes only. It is not a direct offer or a solicitation of an offer to buy or sell, or a recommendation or endorsement of any product, service or company. bitcoin.com does not provide investment, tax, legal or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.
