Empire Newsletter: Custodia keeps its Fed lawsuit alive

Grab your popcorn

Custodia’s court battle isn’t over yet.

The firm’s fight against the Federal Reserve entered a new phase after it filed a notice of appeal on Friday. Last month, US District Court Judge Scott Skavdahl sided with the Kansas City Fed in a summary judgment.

The crypto-focused bank, in its initial complaint filed in 2021, alleged that it would be reduced to being a “second-class citizen” by not being authorized for a Master Account with the Fed. That account would allow Custodia to directly access the Fed’s banking system rather than going through an intermediary bank.

The suit was filed after the Fed dragged its feet and delayed Custodia’s application, and has been ongoing ever since. The Fed officially denied the master account bid in January 2023, two years after the initial filing.

Judge Skavdahl, in his judgment last month, wrote that the Fed maintains the “discretion to grant or deny master account requests” and that the Fed didn’t “owe” Custodia master account approval. 

Read more: Why Custodia’s loss isn’t the end of its Fed fight

So Custodia took the most obvious next step (other than just accepting that judgment) and submitted its appeal notice to the Tenth Circuit Court of Appeals. 

If Custodia is able to successfully win its bid for an appeal and goes on to receive a successful judgment, then the Fed will have no choice but to seriously consider its bid. After its initial denial, Custodia alleged that the Fed ’s decision was “arbitrary” — a word that crypto became very familiar with after an Appeals Court sided with Grayscale in its lawsuit against the SEC last year. 

However, if the judge’s original decision is upheld, then not only does Custodia have to allow an intermediary bank to access the Fed’s system on its behalf, but also set a potentially exclusionary precedent.

Custodia’s case is the latest in an array of crypto-centric cases that may set the tone for how the industry interacts with regulators and the US government going forward.

Additionally, Custodia also said “no thanks” to a bill of costs filed by the Kansas City Fed, which is trying to get the crypto bank to pony up $25,758.

Custodia argues that paying the sum could risk “chilling” potential future lawsuits focused on how the government and its agencies interact “in an area of law that is of critical importance.”

There are still a lot of unknowns in this case. But one thing’s for certain: Crypto isn’t backing down. Sometimes, it’s worth it to take a page out of Gary Gensler’s book and take it to the courts.  

— Katherine Ross

Data Center

• Top stablecoins USDT, DAI and USDC altogether processed $1.369 trillion in the past 30 days — higher than Visa’s 2023 monthly average, Nansen found. 
• Arbitrum saw more DEX volume than Binance Smart Chain over the past day: $481 million to $424 million. BSC is often second behind Ethereum for daily volume.
• Onchain hedge fund Ethena has shed 10% of its ETH-denominated stake over the past two weeks, while the price of ETH has risen only 2.5%.
• Blast flipped Arbitrum to lead in daily derivatives volume , $1.77 billion to $1.39 billion.
• Solana AMM Raydium has generated more fees than PancakeSwap in the past week: $8.99 million to $7.23 million, per DeFiLlama. Raydium is now fourth for weekly DeFi fees behind Uniswap, Lido and Ethereum.

Can’t outrun degeneracy

EigenLayer is tipped as the largest airdrop in crypto history — even though it doesn’t really exist.

EigenLabs, the Seattle-headquartered firm behind the Ethereum restaking protocol, is yet to formally declare a token airdrop. Still, rumors of impending confirmation flew around Twitter over the weekend, coinciding with a 5% rally in the price of ETH and worries about insider trading.

Everyone expects an EigenLayer airdrop because of its points program. The protocol distributes one point for every ETH staked for one hour — measuring participation in “ETH hours.”  

Read more: DeFi ‘points’ farming has reshaped the crypto investment landscape

EigenLayer aims to allow Ethereum stakers to use their ETH in consensus for sidechains and other services in return for yield. While yield functionality isn’t quite there yet, there’s now almost $16 billion ETH and liquid staking tokens already tied up in the platform waiting to be deployed.

So far, EigenLayer has sent 4.63 billion points to users across about 116,000 unique addresses, including those tinkering with the mess of DeFi apps that interact with the protocol, like Ether.fi, Gearbox, Pendle and Renzo.

Those apps, plus about a half-dozen others, stake ETH tokens with EigenLayer, which means they also earn points on behalf of their users. The apps then pass those points down along the chain, in many cases along with a separate set of points earned via programs for the individual apps. 

Points on points, on top of yield. 

There’s now nearly $17 billion TVL in apps that support EigenLayer points farming, up from around $500 million at the start of the year

Dozens of airdrops have used a points system to scale token distributions. But EigenLabs founder Sreeram Kannan has said the network’s points program is just a measure of participation in the ecosystem, a way for services building on EigenLayer to find operators with the most experience with the protocol. 

More points should mean lower risk of slashing and other technical hiccups. Kannan says the team hasn’t thought far enough ahead to consider a token. He was giggling as he said that, in a recent interview with Laura Shin, but the sentiment aligns with messages from an EigenLayer Discord moderator shared last month, who mysteriously said there “was no plan of a token and there won’t be any airdrop.”

Still, Kannan reasoned that points could be used to calculate sway in governance decisions. That would mean EigenLayer points would eventually double as a stand-in for a governance token. 

Kannan maintains he doesn’t want to engage in degeneracy. But the points program has already done that for him: EigenLayer points were quickly tokenized, traded and now increasingly used for leverage across the DeFi space, leaving little reason to rug users of an EigenLayer airdrop this far down the line.

Will it really be the biggest airdrop in crypto history? That entirely depends on how EigenLabs aims to distribute the airdrop. 

If one point equals one token, the current price of KelpDAO’s tokenized EigenLayer points implies a hypothetical market cap of EigenLayer points of $670 million.

— David Canellis

Don your macro hat

If you’ve been disregarding the macro narrative recently — which, given last week’s inflation and GDP data, is unlikely — it’s time to tune in. 

The yen posted a major rebound early this morning. This move fueled speculation that either the government or the Bank of Japan stepped in to support the currency.

Even as markets were closed Monday, the yen posted wild swings. The currency surged more than 2% after earlier losing more than 1.2% to 160.17 per dollar, its lowest point since 1986. These swings may be typical for cryptos or equities, but for the third-largest economy’s currency, this is a huge deal. 

Vice minister of finance Masato Kanda declined to comment on whether or not central bankers had stepped in, Reuters reported this morning. 

Read more: Japan’s crypto policy takes a positive step forward

An intervention matters because it means officials are selling USD to buy yen, potentially increasing USD supply in the market and weakening the value of the dollar. The DYX was down around 0.3% this morning. 

But this week is special. A new FOMC meeting is coming up. The Fed is expected to keep interest rates steady (thanks to persistent inflation), which is likely to boost the dollar. 

If you’re wondering what all this means for hedges like bitcoin and gold, we’re asking ourselves the same thing. 

Bitcoin didn’t seem to respond to this morning’s yen volatility. BTC sat around $62,270, down about 2% over 24 hours around 8 am ET. 

The day is young, though — we’ll see whether traders flock to safer skies. 

— Casey Wagner

The Works

• Australia may join the ranks of countries offering spot bitcoin ETFs by the end of 2024, Bloomberg reports. 
• Japanese company Metaplanet, the so-called Asian MicroStrategy, said it bought roughly 97 bitcoin worth $6.25 million. 
• BlackRock’s bitcoin ETF added Moonpay Chief Legal Officer Linsey Haswell to the fund’s board, according to SEC filings. 
• Following the charges against the Samourai co-founders, Wasabi Wallet opted to block US citizens.
• UK police have new powers to seize crypto during criminal investigations, the government said Friday.

The Morning Riff

Bump in the road or true sign of the times?

There are a few ways of weighing the layoffs announced on Friday over at Yuga Labs: a reflection of the tough market state for blue-chip collections like BAYC, the next step for a company that just changed CEOs, a signal that the effects of the recent bear market are, in some ways, still with us. 

I think it’s worth exploring the latter. Some parts of the market — looking at you, staking — are incredibly buzzy. Other areas, NFTs especially, don’t draw the same crowds they once did. Maybe that cyclicality is healthy, maybe not.

“Crypto is back” is a phrase I see a lot out there these days. Maybe it’s better to say that a new era of crypto is here. A boom without the retail hordes of yesterday. 

It’s a weird one, thus far. 

— Michael McSweeney

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