Custodia Bank CEO Cites Fed Policy as Unfair to Crypto Innovation

Custodia Bank CEO Caitlin Long has publicly criticized the US Federal Reserve for maintaining policies that she believes give large banks an unfair advantage in the stablecoin market. Long argues that while the Fed has rescinded several restrictive crypto policies, it has kept in place a key rule from January 2023 that prevents banks from directly engaging with cryptocurrencies.

Long's criticism centers on the Fed's decision to rescind four pieces of guidance while retaining a policy that prohibits banks from holding cryptocurrencies for their own accounts, even for covering small blockchain transaction fees. This policy also bars banks from issuing stablecoins on public blockchains like Ethereum, instead favoring permissioned, private networks typically operated by large financial institutions.

According to Long, the Fed's actions create an unfair advantage for major banks seeking to issue private stablecoins, while stifling innovation on private networks. She pointed out that the Fed's April 24 announcement listed every piece of guidance it rescinded but made no mention of the rule it left untouched. This remaining policy severely limits banks’ ability to offer crypto custody services, as they are unable to pay fluctuating gas fees out of pocket when processing on-chain transactions.

Long's concerns are echoed by Senator Cynthia Lummis, who criticized the Fed's latest rollback as "just lip service." Lummis argued that the central bank continues to use "reputational risk" warnings to restrict banks from engaging with Bitcoin and other digital assets, labeling them "unsafe and unsound." She vowed to continue holding Fed Chair Jerome Powell accountable, warning that many architects of past crackdowns still influence policy today.

Despite efforts by the Trump administration to push for a more crypto-friendly environment, Long and Lummis contend that federal regulators remain resistant to full-scale blockchain innovation. This resistance, they argue, could entrench big-bank dominance over emerging stablecoin markets, giving them a head start while other institutions await new federal stablecoin legislation.