Law Firm Williams & Connelly Takes the Fed to Court on Behalf of a Peculiar Crypto Startup

By Pam Martens and Russ Martens: August 23, 2022 ~

Caitlin Long, CEO and Founder, Custodia Bank

Caitlin Long, CEO and Founder, Custodia Bank

Caitlin Long is the founder and CEO of a crypto startup called Custodia Bank, previously known as Avanti Financial Group. Custodia is allowed to call itself a “bank” – despite the fact that it does not have FDIC insurance on deposits – because of a 2019 law in Wyoming that allows Custodia to operate as a Special Purpose Depository Institution (SPDI).

The lack of federal insurance on bank deposits and Wall Street’s wild speculations are what led to thousands of banks going belly up following the 1929 stock market crash.

Wyoming has become to crypto what the state of Delaware is to corporate secrecy – a very friendly venue. Since 2018, Wyoming has passed a flurry of laws to effectively roll out the red carpet to crypto startups and their army of lobbyists. The University of Wyoming even offers a Minor in Blockchain, notwithstanding the fact that 1,600 of the smartest minds in technology have called both blockchain and crypto a sham.

But Caitlin Long’s ambitions go far beyond Wyoming. She wants Custodia Bank to become a member bank of the Federal Reserve and obtain a Master Account from the Federal Reserve Bank of Kansas City, one of the 12 regional Federal Reserve Banks. This would effectively usher in the dangers and blowups in the crypto world into the U.S. payments system.

John Villa, Law Partner at Williams & Connolly

John Villa, Law Partner at Williams & Connolly

The inherent risks to the U.S. financial system notwithstanding, Caitlin Long has somehow managed to retain one of the most prestigious law firms in Washington, D.C. to sue the Federal Reserve in Federal District Court in Wyoming for not giving Custodia Bank what it’s asking for without further delay. That law firm is Williams & Connolly and four of its lawyers are listed on the lawsuit, including John Villa, who is Co-Chair of the firm’s Financial Services and Banking Practice Group.

The other three lawyers from Williams & Connolly are: Ryan Scarborough, Jamie Wolfe, and Whitney Hermandorfer, whose bio includes this fascinating tidbit:

“Whitney rejoined Williams & Connolly in 2021 after serving as a law clerk to Justice Amy Coney Barrett of the United States Supreme Court. Whitney previously clerked for Supreme Court Justice Samuel A. Alito in October Term 2018; for Justice Brett M. Kavanaugh when he served as a Judge of the United States Court of Appeals for the District of Columbia Circuit; and for Judge Richard J. Leon of the United States District Court for the District of Columbia.”

Coney Barrett, Kavanaugh and Alito are considered three of the most conservative justices on the Supreme Court and thus likely to be sympathetic to challenges to the Federal Reserve, should the case end up at the Supreme Court.

The case is Custodia Bank Inc v. Federal Reserve Board of Governors, et al (Case Number 1:22-cv-00125-SWS) in the Federal District Court in Wyoming. You can read the Federal Reserve Board’s memorandum in its motion for dismissal here.

Two pivotal questions are why would a prestigious law firm in Washington D.C. take a case for a crypto startup in Wyoming, and how does this startup even have the money to pay such high-priced lawyers?

The answer to both questions is likely the interesting source of the money behind the startup. According to the official website for Custodia Bank, its investors include a closely-knit crypto network of hedge funds and their billionaire backers who may well have a vested interest in getting Master Accounts handed out to crypto banks by the Fed.

Williams & Connolly is not the only law firm to smell mega billable hours in the world of crypto. In 2020, 12 lawyers left Boies, Schiller Flexner to form a boutique law firm specializing in crypto legal matters.

Latham & Watkins also has a crypto practice that it describes as follows:

“Latham, named Band 1 for FinTech by Chambers USA, regularly serves emerging and blockchain-enabled technology companies, investors, crypto exchanges, broker-dealers, and leading global financial institutions that are revolutionizing the delivery of financial services…

“A dedicated global team of more than 80 lawyers focuses on tracking and analyzing developments affecting the blockchain and cryptocurrency industry, spanning multiple practice areas within the firm. The Latham team includes former enforcement supervisors and prosecutors from the US Commodity Futures Trading Commission, US Securities and Exchange Commission, UK Serious Fraud Office, UK Financial Conduct Authority and the Securities & Commodities Fraud Task Force of the US Attorney’s Office for the Southern District of New York, as well as former senior US Department of Justice officials.

“Latham serves on and partners with: The Enterprise Ethereum Alliance’s Legal Industry Working Group; The Global Blockchain Business Council; The Fintech Association of Hong Kong; The Fintech Working Group of the Asia Securities Industry & Financial Markets Association (ASIFMA); The Global Blockchain Council of the United Arab Emirates; The World Economic Forum’s Centre for the Fourth Industrial Revolution.”

Clearly, the battle lines have been drawn in the crypto debate. It seems to come down to a battle between the integrity of the U.S. financial system versus the quest for billable hours by Big Law. Sadly, Americans know how that ended in Wall Street’s subprime scams that eviscerated the U.S. financial system and U.S. economy from 2007 to 2010.

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