Federal Reserve Rejects Custodia Bank's Membership Bid

Federal Reserve Denies Custodia Bank's Membership

The U.S. Federal Reserve recently declined the application of Custodia Bank, a crypto-focused institution, to join the Federal Reserve System. The decision was based on the bank's proposed business model, which the Fed deemed to pose significant safety and soundness risks. Custodia Bank, based in Wyoming and chartered as a special purpose depository institution, was found lacking in a sufficient risk management framework to handle the elevated risks tied to digital assets. These risks include the potential for money laundering and terrorist financing.

Reaction from Custodia Bank

Custodia Bank expressed surprise and disappointment at the Federal Reserve's decision. The bank's Chief Executive, Caitlin Long, emphasized that Custodia had actively sought federal regulation and had met all necessary requirements beyond those of traditional banks. Despite these efforts, the application was rejected, prompting Custodia to pursue legal action against the Federal Reserve Bank of Kansas City. The lawsuit claims that there was an unfair delay in deciding on their application for a master account, which is crucial for accessing Fed payment services.

Policy Implications and Future Prospects

Alongside the rejection, the Federal Reserve issued a policy statement clarifying the limitations on activities related to cryptocurrency for banks under its supervision. This applies to both insured and uninsured institutions. The policy does not prohibit state member banks from offering custodial services for crypto-assets, provided these services are performed safely and comply with consumer protection, anti-money laundering, and anti-terrorist financing laws. The Fed aims to ensure that all banks, irrespective of their focus on digital assets, adhere to stringent risk management and regulatory standards.