Fed delivers devastating surprise to bitcoin and crypto after huge price spike

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BitcoinBTC and cryptocurrencies exploded in the new year with the combined crypto market rallying above the $1 trillion mark (a rally that some believe may just be beginning).

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Bitcoin price settled at around $23,000 per bitcoin after a $200 billion earthquake in the crypto market.

Now, the US Federal Reserve has dealt a crushing blow to the crypto industry’s hopes of mainstream acceptance by rejecting crypto bank Custodia’s application to become a member of the Feds system, warning that it suffers from “significant security and soundness risks”.

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The Federal Reserve, under the chairmanship of Jerome Powell, discovered that the Custodia Bank was focusing on bitcoin and crypto… [+] presents “significant security and soundness risks”.

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Wyoming-based Custodias said “the new business model and proposed focus on crypto-assets presented significant security and soundness risks,” the Federal Reserve board said in a statement.

“The Board of Directors has previously made it clear that such crypto activities are very likely to be inconsistent with safe and sound banking practices,” the Fed said, adding that “Custodia’s risk management framework was insufficient to address concerns about heightened risks associated with its proposed crypto businesses, including its ability to mitigate money laundering and terrorist financing risks.”

Custodia, known as Avanti before February last year, applied to join the Fed system two years ago.

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

Last year, Custodia sued the Federal Reserve Board and the Federal Reserve Bank of Kansas City, accusing them of “unlawfully” delaying a decision on its application for the Fed’s main account.

Fed Chairman Jerome Powell has previously warned against granting prime accounts for crypto-banks that could trigger a flood of requests, saying the Fed needs to consider “the broader security implications and soundness” and calling an endorsement “just extremely precedent”.

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The Fed’s slap on crypto banking comes after the crypto banking sector suffered extreme volatility and pullbacks following the collapse of the FTX shock.

California-based Silvergate, described by FTX founder Sam Bankman-Fried as a banking revolution for blockchain companies, has seen its share price crash nearly 90% in the past six months and recorded bitcoin and crypto outflows of over $8 billion in the fourth quarter of 2022.

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