The US Federal Reserve Board has denied Custodia Bank’s application to become a member of its system. According to the decision made Friday, the digital asset lender submitted an application that does not meet the required criteria.
Federal Reserve Board Claims Custodia Bank’s Proposed Business Model Poses Risks
Custodia Bank’s membership in the US Federal Reserve System has been refused. The announcement published on January 27 points out that the application submitted by the company is identified as “inconsistent with the criteria required by law.”
The press release further elaborates that Custodia is a depository institution that provides a special service and is not federally insured. This includes the issuance of crypto assets, as well as “unproven cryptographic activities.” In this context, the Board argued:
The firm’s new business model and the proposed focus on crypto assets were deemed dangerous.
The Federal Reserve Board recalled that it had already determined that “it is highly likely that such cryptographic activities are inconsistent with safe and sound banking practices.” It was said that the firm’s risk management framework, including its ability to mitigate money laundering and terrorist financing risks, was insufficient to address the related issues.
“In light of these and other concerns, the company’s request, as submitted, was not consistent with the factors that the Board is required to evaluate by law,” the company said in the statement that the order is likely to be made public later due to confidential information.
Membership in the Federal Reserve System would have given Custodia, a financial institution chartered and regulated by the state of Wyoming, many benefits. You can read more about a tweeted statement from Chief Executive Caitlin Long, in which the company expressed its “surprise and disappointment” with the board’s move, stating:
Custodia provided a safe, solvent, and federally regulated alternative to reckless speculators or cryptocurrency scammers who penetrated US banks, with disastrous results for some banks.
Long stressed that Custodia actively sought federal regulation, “going beyond all the requirements that apply to traditional banks.” He also pointed out that it is well known that refusals are due to issues raised by the company regarding the Fed’s response to its requests and promised that it would litigate the matter.
The term executive refers to a lawsuit filed by Custodia against the central bank system’s delay in requesting a master account. The company has not yet identified the issue on Twitter. Banks keep most of their reserves in master accounts at the Federal Reserve, which they can use to transfer and settle funds between each other.
Also on Friday, the Federal Reserve Board issued a policy statement stating that all insured and non-insured bank institutions will be subject to restrictions on certain activities, including those related to crypto assets.
Can we expect the US Federal Reserve Board to soon change its stance on similar applications as the one submitted by Custodia Bank? Please share your thoughts in the comments below.
