Federal Reserve rejects crypto bank’s request to join Fed system

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The Federal Reserve on Friday rejected the Wyoming-based crypto bank Custodia’s application to become a member of the Federal System, noting that the bank’s focus on crypto created significant security and soundness risks and therefore did not respond. not meet the requirements of the law.

The company’s new business model and proposed focus on crypto-assets presented significant security and soundness risks, the Fed said in a statement. “The Board has previously made it clear that these crypto activities are very likely to be inconsistent with safe and sound banking practices.”

The Fed’s decision comes more than two years after Custodia applied for membership.

Custodia, formerly known as Avanti, operates using a special Wyoming state license for banks dealing with crypto. Custodia sued the Federal Reserve Bank of Kansas City for delaying a decision to grant it a main account at the Fed, arguing that a main account decision would normally take five to seven business days.

As a member bank, Custodia would have been regulated and scrutinized directly by the Federal Reserve Board in addition to the Wyoming Division of Banking.

Custodia is surprised and disappointed with the board’s action today,” Custodia CEO Caitlin Long said in a statement Friday. “The Fed informed Custodia 72 hours ago that it could either withdraw its membership application, or see it denied, and the Fed denied in record time.”

“The board’s denial is unfortunate,” Long added, “but consistent with concerns Custodia has raised about the Federal Reserve’s handling of its requests, an issue we will continue to advocate.”

U.S. Federal Reserve Chairman Jerome Powell attends a news conference in Washington, DC, U.S. December 14, 2022. The U.S. Federal Reserve on Wednesday raised interest rates to their highest level in 15 years, signaling that the central bank’s battle against inflation is far from over. (Photo by Liu Jie/Xinhua via Getty Images)

Asked about granting prime accounts to crypto firms during his confirmation hearing last January, Fed Chairman Jay Powell indicated that once the central bank grants a request, it will open a box. of Pandora.

When we start granting them, there will quickly be a few hundred and we need to think about the wider safety and soundness implications and their precedents, Powell said.

The story continues

In its Friday statement, the Fed said it “also found that Custodia’s risk management framework was insufficient to address concerns about increased risks associated with its proposed crypto businesses, including its ability to mitigate the risks of money laundering and terrorist financing”.

Simultaneously on Friday, the Fed released a policy statement aimed at promoting a level playing field for all banks with federal supervisors, regardless of their deposit insurance status.

The statement makes it clear that uninsured and Fed-regulated insured banks will be subject to the same limits on activities, including crypto. It also notes that Friday’s action would not prevent a member state bank, or a potential candidate, from providing custodial services, as a custodian, for crypto-assets if conducted in a secure manner. and sound and in compliance with consumer, anti-money laundering and terrorist financing laws.

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