Federal Reserve Unanimously Rejects Crypto Bank Custodia’s Request – Ledger Insights

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On Friday, the Federal Reserve Board announced that it had rejected Custodia Bank’s application to become a member of the Federal Reserve System. Custodia is a Wyoming state chartered bank without FDIC insurance. The goal of the special purpose bank is to become a bridge between the digital asset industry and the US dollar payment system.

Additionally, the Federal Reserve issued a policy statement proposing to extend restrictions on crypto-assets to uninsured state-chartered banks to put them on a par with national banks and insured banks. by the FDIC.

The seven members of the Federal Reserve Board voted against Custodia’s access to a main account.

The reasons for the Fed’s rejection include proposals for “new and untested crypto activities that include issuing a crypto asset on open, public, and/or decentralized networks.” Additionally, the Federal Reserve said Custodia’s risk management framework was “insufficient” to deal with the high risks of crypto, especially AML.

The startup bank first asked the Federal Reserve for access to a main Fed account more than two years ago and sued the Federal Reserve over it. Without a direct account, it has to go through intermediaries, adding a layer of costs that blockchain aims to solve.

“Custodia has provided a safe, federally regulated, creditworthy alternative to reckless crypto speculators and scammers who have penetrated the US banking system, with disastrous results for some banks,” said Caitlin Long, CEO of Custodia. “Custodia has actively sought federal regulation, going beyond all requirements that apply to traditional banks. The board’s denial is regrettable but consistent with concerns Custodia has raised about the Federal Reserve’s handling of its requests, an issue we will continue to advocate.

As a special purpose bank, Custodia customer deposits retain 100% backing as the bank is not licensed to lend. He also has his digital dollar issued by the bank, Avit.

Given the collapse of FTX, other crypto failures, and volatility, authorities are clamping down on the industry and trying to keep the ties between the crypto and banking sectors to a minimum.

However, Custodia founder Caitlin Long has a very thoughtful approach to the industry. Since launching Custodia in 2020, it has been keen to provide a regulated path for the digital asset industry. Prior to his involvement in the crypto world, his resume included a nine-year stint at Morgan Stanley, preceded by ten years at Credit Suisse.

In April, Long commented, “Bitcoins are going to bring down a G-SIB (Global Systemically Important Bank) at some point because they don’t understand that settlement risk is so different between Bitcoin and traditional assets. .

Federal Reserve Crypto Proposals for Uninsured State Banks

Friday’s Federal Reserve release was a draft policy statement. It aims to prevent state banks from holding most cryptocurrencies. When it comes to stablecoins, banks would need a letter of no objection from the Federal Reserve and would have enough controls in place.

From a legal standpoint, the Federal Reserve can impose banking restrictions on nationally chartered banks. Since FDIC-insured banks have restrictions similar to national banks, all national banking restrictions also apply to them. The Federal Reserve states that under the Federal Reserve Act, it can impose discretionary limitations on state-chartered banks, and this is used for crypto restrictions.

To date, two Federal Reserve member banks have had significant crypto exposures, with both acting as significant on- and off-ramps for the digital asset industry. The smaller Silvergate reported a quarterly loss of $1 billion, but managed to survive a massive drop in deposits from its digital asset customers. It also offered a range of services, including a limited amount of crypto lending. Its stock price is just over a tenth of the figure compared to May 2022, before the crypto crash.

The larger Signature Bank was already quite diversified, but it recently announced that it would reduce its exposure to the digital asset sector.

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