Why Custodia's loss isn't the end of its Fed fight

The Fed: Custodia can’t sit with us

A judge last week sided with the Federal Reserve in the Custodia Bank lawsuit, confirming that the central bank is under no obligation to grant master account access and membership to all eligible institutions.

Wyoming-based Custodia first brought legal action almost two years ago as the Kansas City Fed dragged its feet on making a decision about Custodia’s membership application. Master accounts allow banks instant access to services like clearing and wire transfers directly from the Fed, meaning institutions don’t have to go through intermediaries.

When Custodia’s application was denied in early 2023, Custodia’s legal team pivoted and amended the suit, arguing that the Fed’s board of governors had a hand in the regional bank’s rejection.

Judge Scott Skavdahl disagreed, stating that there was no evidence that Kansas City officials didn’t reach their decision on their own. Skavdahl said they were completely within their right to reject any application they want, even if the bank does fit the master account requirements.

Custodia’s team said they are considering their “options” and an appeal is not off the table. Sounds like an expensive uphill battle.

The Fed frequently rejects master account applications, and now a federal judge has established a precedent stating that they are allowed to do just that. It’s hard to imagine where Custodia could go from here, but founder and CEO Caitlin Long has never been known to back down from a challenge.

Long didn’t issue any posts on X herself, but she did re-post a series of messages supporting her bank, including one that likened the whole situation to another “Operation Chokepoint” scenario.

The so-called Chokepoint 2.0 — the idea that the federal government is strategically blocking crypto’s access to banking services — has been a conspiracy in the crypto space for years. The narrative especially picked up steam in 2023 when crypto-friendly banks Silvergate and Signature shuttered.

“What began as a trickle is now a flood: The US government is using the banking sector to organize a sophisticated, widespread crackdown against the crypto industry,” Nic Carter, a long-time crypto supporter and venture capitalist, wrote in a 2023 blog post.

Wyoming Senator and crypto-champion Cynthia Lummis chimed in on the court’s Custodia decision, stating that the Fed’s denial is “unacceptable” and Skavdahl’s ruling “goes against clear laws enacted by Congress.”

At this point, Custodia’s best bet is probably a federal law requiring regional Fed branches to approve applications that meet the requirements — perhaps an effort Lummis will spearhead — although we know bills never move fast in DC, especially in an election year.

– Casey Wagner

Data Center

DeFiLlama reports $261 billion in decentralized exchange volume across all blockchains in March.
Crypto security firm PeckShield said that among the more than 30 hacks across the crypto space in March, roughly $188 million was lost — with about $98 million recovered.
NFT marketplace Magic Eden’s volumes grew nearly 200% in the past month, according to DappRadar.
The major US crypto stocks — COIN and MSTR — are down, 1% and 5% respectively, in pre-market trading.
Bitcoin (BTC) is trading just below $70,000 this morning.

In the eye of the Tornado Cash storm

The Tornado Cash saga continues.

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As Roman Storm’s team filed a motion to dismiss, Dutch prosecutors are reportedly eyeing a 64-month sentence for the developer.

Storm’s team argued that Tornado Cash was “immutable and publicly available” and therefore Storm and others who worked on Tornado Cash couldn’t prevent a “sanctioned entity” from using Tornado Cash.

“It is well established that computer code is speech the First Amendment protects. Yet, all three counts here seek to criminalize the development and publication of code and the maintenance of a website that provided open-source software,” Storm’s team wrote.

Pertsev, in the Netherlands, faced lines of questioning from a panel of judges last week about open-source coding and why Pertsev had to make a smart contract’s source code public when deploying the contract, according to Ethereum developer Ameen Soleimani.

Storm was arrested in August of last year, and the motion to dismiss alleges that Storm had met with and tried to work with law enforcement prior to his arrest.

The Treasury announced sanctions against Tornado Cash in 2022, alleging that the service allowed for the laundering of over $7 billion in crypto. Tornado Cash has been used to hide some activity on the blockchain.

The open cases against developers of Tornado Cash are setting the stage for a much larger fight about the future of mixers. The US and Dutch governments are arguing that the service is dangerous, with the US going so far as to declare that it’s a national security issue.

However, the long-standing arguments — made since Tornado Cash was sanctioned two years ago — are that the service doesn’t lean towards the bad or the good, and is inherently neutral, like a VPN.

From our oped section: Tornado Cash got wrecked, and we could have prevented it

The May sentencing of Pertsev, and the court’s decision on the motion to dismiss, will bring the back and forth around the service to a head once and for all.

– Katherine Ross

The far-seeing unicorn?

The startup behind Farcaster, the decentralized social media protocol, has reportedly scored a $1 billion valuation in a new funding round.

According to Bloomberg, the funding round for Merkle Manufactory is led by Paradigm, the crypto investment firm. It’s not known precisely how much the firm will raise; it garnered a $30 million seed round in 2022, per Crunchbase data.

By all accounts, Farcaster’s star appears to be rising. The protocol’s bid to become a new town square for crypto was buoyed by the launch of Frames in January. Co-founder Dan Romero said yesterday that the platform scored a new high for daily active users. “70K+ DAU yesterday. New record,” he wrote.

It’s tempting to draw a connection between apparent success and the seeming troubles over at Elon Musk’s X, formerly Twitter. As NBC detailed, one data-tracking service recently claimed that X’s global daily active user count tumbled in February — 174 million, a decline of 15% from a year before. X claimed a different, higher number for DAUs: 250 million globally.

Meanwhile, much ink has been spilled over X’s advertiser exodus, driven in no small part by Musk’s controversial behavior on the site.

As Business Insider reports, Musk’s electric car company, Tesla, recently bought ads on X.

Does Farcaster’s reported unicorn round reflect the blood in the social media water? Perhaps. It could just as easily further signal that the positive vibes are indeed back in the crypto world and investors are once again eager to sign big checks for noteworthy projects. We might gain further insight once additional information about the funding round drops.

Stay tuned.

– Michael McSweeney

The Works

Social media platform Telegram is now accepting TONcoin for advertising, as part of a revenue sharing announcement over the weekend.
The Wall Street Journal reports that middlemen in Russia used USDT to purchase weapons manufacturing components and avoid US sanctions.
BitKub, Thailand’s biggest crypto exchange, is aiming to go public next year, according to its CEO.
The Biden administration is pushing big tech companies to explore new ways to generate electricity as AI fuels a power consumption surge.

The Morning Riff

Stop “poo-pooing” memecoins, says Arthur Hayes.

The former CEO of BitMEX argued that memecoins add value because “the chains that support this culture are going to be the chains that have value.”

He added that the coins bring “attention and more engineers to the space,” setting up opposition to Vitalik Buterin’s argument that there isn’t anything “new and interesting” about memecoins.

Check out what Hayes had to say on YouTube:

– Katherine Ross

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