The Federal Reserve on Friday rejected Wyoming-based crypto bank Custodia's application to become a member of the Fed’s system, noting the bank's focus on crypto created significant safety and soundness risks and therefore didn’t meet requirements under the law.
“The firm's novel business model and proposed focus on crypto-assets presented significant safety and soundness risks,” the Fed said in a statement. "The Board has previously made clear that such crypto activities are highly likely to be inconsistent with safe and sound banking practices."
The Fed's decision comes over two years after Custodia applied to become a member.
Custodia, formerly known as Avanti, operates using a special state license from Wyoming for banks dealing with crypto. Custodia sued the Kansas City Federal Reserve Bank for delaying a decision to grant it a master account at the Fed, arguing that a master account decision should ordinarily take five to seven business days.
As a member bank, Custodia would have been regulated and examined directly by the Federal Reserve Board in addition to the Wyoming Division of Banking.
“Custodia is surprised and disappointed by the board's action today," Caitlin Long, CEO of Custodia, said in a statement on Friday. "The Fed advised Custodia 72 hours ago that it could either withdraw its membership application or see it denied, and the Fed denied it in record time."
"The board's denial is unfortunate," Long added, "but consistent with the concerns that Custodia has raised about the Federal Reserve’s handling of its applications, an issue we will continue to litigate."
When asked about granting master accounts for crypto firms at his confirmation hearing last January, Fed Chair Jay Powell indicated that once the central bank granted one application it would open a can of worms.
“When we start granting them there will be a couple hundred of them quickly and we have to think about the broader safety and soundness implications and it’s just hugely precedential,” Powell said.
In its statement on Friday, the Fed said it, "also found that Custodia's risk management framework was insufficient to address concerns regarding the heightened risks associated with its proposed crypto activities, including its ability to mitigate money laundering and terrorism financing risks."
Simultaneously Friday, the Fed issued a policy statement to promote a level playing field for all banks with a federal supervisor, regardless of deposit insurance status.
The statement makes clear uninsured and insured banks regulated by the Fed will be subject to the same limits on activities, including crypto. It also notes that Friday's action wouldn't stop a state member bank, or prospective applicant, from providing safekeeping services, in a custodial capacity, for crypto-assets if conducted in a safe and sound manner and in compliance with consumer, anti-money laundering, and anti-terrorist financing laws.
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(Reuters) -The U.S. Federal Reserve on Friday rejected crypto-focused Custodia Bank's application to become a member of the Federal Reserve System, saying the bank's proposed business model and focus on digital assets presented significant safety and soundness risks. Custodia, which is based in Wyoming and is chartered through the state as a special purpose depository institution, lacked a sufficient risk management framework to address the heightened risks associated with crypto, the Fed said, including crypto's potential use in money laundering and terrorist financing activities. Custodia Bank Chief Executive Caitlin Long said in a statement that the bank was "surprised and disappointed" by the Fed's decision.
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