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Sen. Cynthia Lummis (R-WY), who serves on the Senate Banking Committee, is among lawmakers blocking President Biden’s nominees to the Federal Reserve Board.
At his State of the Union address, President Biden urged Congress to confirm his five nominees for the Federal Reserve Board of Governors. In their absence, a more hawkish Federal Open Market Committee dominated by regional Fed bank presidents could push the lever on interest rates uncomfortably quickly and cause real economic pain in the name of fighting inflation.
Currently, those Fed nominees are stuck behind a Republican blockade, with a GOP boycott of the Senate Banking Committee markup making it impossible for the nominees to get a floor vote. The reason for this delay is conservative opposition to Sarah Bloom Raskin, tapped to be the Fed vice chair for supervision. Raskin has been confirmed by the Senate twice before with unanimous support, but her willingness to be a strong bank regulator, and prevent financial institutions from taking on undue risks with fossil fuel–heavy assets, has big business worried. They’ve activated their Republican allies.
GOP Banking Committee members have latched onto a story about how Raskin, while serving on the board of a Colorado-chartered fintech firm called Reserve Trust, personally lobbied the Kansas City Fed for a master account, which would give it access to the central bank payment system. Reserve Trust did get its master account in 2018.
Reserve Trust’s founder has called the allegations against Raskin “completely false,” saying that the master account was granted only after the company changed its business model. (The Kansas City Fed, which granted the account, backed this up, though the Colorado Division of Banking has disputed this.) But the explanations haven’t been sufficient for the committee’s top Republican, Sen. Pat Toomey (R-PA), or Sen. Cynthia Lummis (R-WY), who repeatedly hammered Raskin over the master accounts in a Banking Committee hearing.
However, Lummis has an ulterior motive for raising the master account issue, one that she hasn’t been particularly shy about stating. For months, Lummis has been publicly lobbying for two crypto companies in Wyoming to get their own master accounts. Specifically, these firms are state-chartered non-banks intended to allow their customers to convert crypto assets into cash—but they need a master account in order to do that.
Effectively, these firms would become very similar to a bank, with full access to the Fed’s payment system, but without having to submit to federal regulation or even FDIC deposit insurance. Experts have warned of potentially grave consequences for financial stability and consumer protection. Lummis, critics argue, is pressuring the Fed to make that happen, and using the Raskin/Reserve Trust situation as leverage.
Lummis’s bid to get crypto into the banking system is “totally underappreciated,” said Lee Reiners, a lecturing fellow at Duke University (where he works with Raskin, a professor at Duke) and executive director of its Global Financial Markets Center, who has written about the issue. “This is like the OCC [Office of the Comptroller of the Currency] allowing derivatives in the 1990s. It’s that momentous a decision.”
At Raskin’s Senate hearing, Lummis’s primary complaint was not just that she allegedly intervened to get Reserve Trust a master account, but that the entities in Wyoming weren’t given the same treatment. “My state’s companies, my constituents have been stonewalled, have been slow-walked and have not been able to get approval,” she said.
Indeed, Lummis asked Fed chair Jerome Powell and governor Lael Brainard, who have both been renominated for positions on the Board of Governors, about master accounts at their confirmation hearings. She published an op-ed last November in The Wall Street Journal saying that Powell and Brainard would be “unworthy to serve” if they did not give Wyoming crypto institutions payment system access. The lobbying is strangely reminiscent of what Lummis is accusing Raskin of: calling in favors and even threatening consequences unless master accounts go to her preferred allies.
Asked by the Prospect, a Lummis aide said that she simply wants the Fed to follow the law, to give a response to requests for a master account within a year. The aide also made the distinction that the senator, unlike Raskin, doesn’t sit on the board of any of these state-chartered banks, and is just representing her state and its industries. But Lummis’s ties to leading crypto practitioners are deep and multifaceted, and they have made Wyoming an outpost for the financial innovation.
These firms would become very similar to a bank, with full access to the Fed’s payment system, but without having to submit to federal regulation or even FDIC deposit insurance.
IN 2019, WYOMING passed a law establishing “special purpose depository institutions,” or SPDIs. (The irony of these bank-like institutions being called “speedys” is not lost on critics.) These institutions are similar to other state-chartered trusts, but were specifically designed to serve crypto companies; statutorily, they are allowed to accept “digital assets.”
Crypto firms have thus far been stymied by more aggressive federal regulators under the Biden administration. But state-chartered entities have no federal overseer. These “bank lite” facilities cannot lend out but can facilitate crypto transactions; the SPDI innovation is that they can accept deposits.
It has been difficult for crypto firms to establish banking relationships so as to enable customers to convert dollars to crypto assets without incurring high fees at way stations like Coinbase that partner with bigger banks. Having Wyoming-chartered crypto banks would drastically reduce those charges and give crypto a way into the banking system. To pull it off, these entities would have to have a master account, which Lummis has been screaming for.
SPDIs bear an eerie resemblance to crisis-prone pre–New Deal banks. They do not require FDIC deposit insurance; while federal law does not require a bank to carry deposit insurance, at the time that the Wyoming law passed in 2019, Wyoming was the first state to allow its chartered depository institutions to operate without deposit insurance in 30 years. (Nebraska has since passed a similar law.) Because of the lack of insurance, they are also not considered banks under the Bank Holding Company Act; in practice, that means crypto companies can own the SPDIs. (The Lummis aide pointed out that Wyoming law prohibits a commercial firm from owning a controlling interest in a SPDI.)
The situation is similar to a carve-out given to so-called “industrial loan companies”(ILCs), a Utah innovation that allows non-banks to own lending operations. Toyota, Harley Davidson, and other firms own ILCs. They sprung up in Utah because Sen. Jake Garn (R-UT) was chair of the Senate Banking Committee in the 1980s, and he helped secure the carve-out. ILCs are exempt from the Bank Holding Company Act but do at least take FDIC insurance. State banking divisions regulate them.
That is less true in the case of Wyoming’s new SPDI non-bank banks. Regulatory oversight has fallen to the tiny Wyoming Division of Banking. They have been working to establish regulations, even hiring Promontory, a top banking consultant, to assist them with a 700-page examination manual. “Nothing against them, but state banking agencies are under-resourced and understaffed,” said Reiners. Any financial institution would prefer to keep their project away from the level of oversight their competitors face.
The Lummis aide contested this, arguing that Wyoming’s laws on digital assets are the strongest in the nation, and critics of the state object ideologically to crypto rather than having a concern about risk.
A SPDI must hold “liquid assets” equal to the assets that it backs in customer accounts. The Division of Banking set regulations in 2020 to determine whether an asset qualifies as “liquid.” While the Lummis aide noted that Wyoming’s definition mirrors the Fed’s definition of high-quality liquid assets, the Division of Banking initially included investment-grade corporate bonds, as well as state and municipal bonds. The Bank Policy Institute notes that “those assets can be subject to rapid and substantial capital losses in times of stress.” Potentially shaky balance sheets plus no deposit insurance creates the possible conditions for a bank run.
UPDATE: After publication, the Division of Banking explained that amended rules in 2021 changed the guidance on liquid assets in a way that would no longer would permit SPDIs to hold investment-grade corporate bonds or state and municipal bonds.
Wyoming officials have at times noted the audacity of what they’re trying to do. In October 2020, Fred Rife, who at the time was the interim director of the state Department of Audit, giving him a seat on the banking board, said at a hearing on SPDIs that the banking division was “out on the leading edge and they’re doing things that nobody else in the country’s been asked to do at this point.” Contacted for this story, Rife said that he no longer served as interim director, and referred questions to the Division of Banking.
THE SPDI LAW is one of over a dozen passed in Wyoming in 2018 and 2019 involving crypto and blockchain technologies. “They want to be the Delaware of crypto,” said Reiners, referring to that small state’s infamous role as state flag of convenience for national corporations.
Wyoming was targeted for similar reason as Delaware was; a smaller state without heavy industry or massive funding can easily be tempted into serving as a haven for dubious businesses. Reiners explained that Wyoming has a part-time legislature that meets for just 60 days every two years; they could hardly be expected to be experts in highly technical digital asset issues. But they’ve had a lot of help. “It’s pretty obvious when you study it that the policymaking apparatus has been captured by the interests of crypto,” Reiners said.
Caitlin Long, a Morgan Stanley veteran and Wyoming native, returned home to set up the crypto firm Avanti (which has since changed its name to Custodia). In 2017, Long co-founded the Wyoming Blockchain Coalition, and according to Forbes and Slate, she was instrumental in advising on the flood of laws passed by the Wyoming legislature, particularly the SPDI law. After it passed, Avanti received a SPDI charter in October 2020. Kraken, another veteran crypto firm, also received a charter. There are at this point four state-chartered SPDIs, though the Division of Banking notes that none are currently in operation.
Avanti/Custodia and Kraken have been working with the Fed to get master accounts for a while; last month, Avanti received a routing number from the American Bankers Association, a key step in the process. The firm has been touted by its investors as “rewriting the rules on banking.” (Avanti has also applied to be supervised by the Fed, the Lummis aide noted.)
When the Wyoming Division of Banking, in response to concerns about SPDI stability and risk, recommended amendments to the law, including removing corporate debt from its definition of liquid assets and prohibiting nonfinancial companies from owning a SPDI, they got exactly one public comment. It was from Avanti, which didn’t like the proposed changes; Long co-signed the letter.
The lobbying is strangely reminiscent of what Lummis is accusing Raskin of: calling in favors and even threatening consequences unless master accounts go to her preferred allies.
Other players in the SPDI law are even closer to Lummis. Chris Land, who works as Lummis’s general counsel, served in the same role at the Wyoming Division of Banking in 2019–2020, when they were giving out SPDI charters and setting rules. Tyler Lindholm, now a state policy director for Lummis, co-sponsored the SPDI law when he served in the Wyoming House of Representatives. Simultaneously, he was “chief of ranching operations” for Beefchain, a blockchain company for livestock transactions that has been certified by the Department of Agriculture.
The Lummis aide likened hiring Land and Lindholm to Sen. Elizabeth Warren (D-MA) hiring regulators with Wall Street experience while standing up the Consumer Financial Protection Bureau, using industry expertise to help define policy.
Lummis, the former Wyoming state treasurer, is also putting her own money into crypto. Last year, she bought up to $100,000 in Bitcoin; she has been invested in the digital asset since at least 2013. She is co-chair of the Financial Innovation Caucus in the Senate, and has received at least $34,000 in campaign donations from individuals in the crypto industry. Donors can even make contributions to her campaign in Bitcoin.
Asked whether Lummis’s investments in crypto create a financial conflict with her pushing the technology, the Lummis aide said that the senator was a “HODLer,” a term used to describe long-term crypto asset holders (it means “hold on for dear life”). Therefore, her holdings would not be affected by SPDIs getting payment access, the aide claimed.
Known as a “bitcoin evangelist,” Lummis vowed last year to introduce comprehensive legislation on cryptocurrencies, with the goal to “fully integrate” crypto into the financial system. The Lummis aide said the proposal would be along the lines of Gramm-Leach-Bliley (the law that repealed the Glass-Stegall reforms) in its import, and would include a self-regulatory organization to oversee digital markets. Critics fear that the SPDIs in Wyoming would accomplish integration of crypto through the back door, as long as they can get master accounts.
Lindholm and Land, in a presentation to the Wyoming legislature’s Select Blockchain Committee last September, said that the state’s competitive advantage with SPDIs was dependent on access to the payment system. “We are losing our first-mover advantage, and that keeps me up at night,” Land said in the presentation. Caitlin Long was also there.
The Kansas City Fed, the same regional bank that granted a master account to Reserve Trust, has the authority to do so for SPDIs. The Fed board in Washington has sought public comment on a proposal it made last May setting transparent guidelines for regional banks giving access to master accounts.
Lummis’s lobbying for SPDIs and her role in the blockading of top Fed officials puts the central bank in a difficult spot. “They’re using what [Lummis] is trying to paint as an improper action as an excuse to get crypto into the banking system,” said Reiners. “The Fed has been sitting on this for a year and a half. They don’t want to do it but will deal with political ramifications.”
AN UNUSUAL COALITION has sprung up in opposition to giving crypto banks master accounts, including regulatory advocates like Americans for Financial Reform but also the American Bankers Association, which warned against “backdoor” access to the payment system for entities without adequate regulation.
Critics argue that risk would pool in SPDIs without proper capitalization. State-chartered trusts without FDIC insurance run the risk of failing and leaving depositors with nothing, as happened with several state-chartered depository institutions in the 1980s and 1990s. SPDIs would also fall short on consumer protection and risk overall financial stability, the detractors claim.
That’s to say nothing of the way crypto has been used to facilitate money laundering and illicit activity, while keeping the true owners anonymous.
But Lummis and her small band of crypto moguls and enthusiasts in the nation’s smallest state by population have dismissed these charges, claiming instead that any regulations on crypto would crush innovation. “We need to educate the U.S. Senate about what this industry actually doing and how [Congress] can be a friend,” Lindholm said at the Wyoming legislature presentation.
Lummis demanding special master accounts for state-chartered crypto banks while decrying Sarah Bloom Raskin’s alleged service getting a master account for Reserve Trust takes this to a new level. Whether the blockade of five Fed nominees from confirmation is explicitly conditioned on getting crypto banks payment access is unclear. But it sure looks like it.
This article has been updated after receiving information after publication from the Wyoming Division of Banking.
