Custodia CEO criticizes Federal Reserve policies for favoring large banks in the stablecoin market.

Custodia Bank’s CEO, Caitlin Long, has accused the Federal Reserve of surreptitiously upholding policies that disadvantage the cryptocurrency sector while creating an illusion of regulatory flexibility.

Long criticized the Fed for revoking several restrictive crypto regulations last week, yet retaining a significant rule from January 2023 that prevents banks from directly engaging in cryptocurrency activities.

She cautioned that this decision would unfairly benefit large banks wishing to issue private stablecoins, simultaneously hindering innovation on decentralized networks.

In a detailed social media post, Long pointed out that while the Fed rescinded four guidance pieces, it intentionally left a crucial policy unchanged. This rule forbids banks from holding cryptocurrencies for their own accounts, even for minor blockchain transaction fees.

Additionally, the rule prohibits banks from issuing stablecoins on public platforms like Ethereum, preferring instead permissioned private networks, which are primarily managed by major financial entities.

Long remarked, “The Fed definitely won on PR spin.”

She noted that the Fed’s announcement on April 24 listed all the rescinded guidance but failed to mention the unchanged rule. She emphasized that this remaining policy severely restricts banks from providing crypto custody services.

Under the current regulations, banks cannot cover variable gas fees out of their own funds when facilitating on-chain transactions, presenting a technical hurdle that hampers their effectiveness in serving digital asset customers.

Long’s critique arises as concerns grow that the Fed is favoring private blockchain options governed by large banks, while inhibiting the growth of decentralized public blockchain systems.

She cautioned that this approach could solidify the dominance of major banks in the emerging stablecoin sector, allowing them to gain an advantage while other organizations wait for new federal stablecoin guidelines.

Senator Cynthia Lummis recently shared Long’s worries, condemning the Fed’s recent rollback as merely “lip service.”

Lummis stated that the Fed continues to use “reputational risk” warnings to prevent banks from engaging with Bitcoin and other digital assets, labeling them as “unsafe and unsound.” She promised to hold Fed Chair Jerome Powell accountable, warning that many responsible for previous regulatory crackdowns still influence current policy.

Despite attempts during President Donald Trump’s administration to foster a more crypto-friendly environment, both Long and Lummis argue that federal regulators remain resistant to embracing comprehensive blockchain innovation.