Custodia Bank’s Proposed Business Model Poses Risks, Says Federal Reserve

The U.S. Federal Reserve Board has rejected the attempt of Custodia Bank to become a member of the Federal Reserve System. According to the decision announced on Jan 27th, the application submitted by the digital asset bank is inconsistent with legal requirements.

Reasons for Rejection

Federal Reserve Board Says Business Model Proposed by Custodia Bank Presents Risks The Federal Reserve Board stated that Custodia’s proposed business model, focused on crypto-assets, posed significant risks to safety and soundness. It also pointed out that the bank’s application was inconsistent with legal requirements.

Risk Management Framework Insufficient

The Federal Reserve noted that the bank’s risk management framework, including its ability to mitigate money laundering and terrorism financing risks, was not sufficient to address relevant concerns.

Board’s Concluding Statement

The Federal Reserve Board concluded in a statement that the firm’s application as submitted was inconsistent with the factors it is required to evaluate by law and that the order would be released after a confidential information review.

Disappointment and Surprised Reaction from CEO

Custodia CEO Caitlin Long expressed surprise and disappointment in the board’s decision, stating that the bank offered a safe, federally-regulated, solvent alternative to the crypto speculators. She emphasized that the bank actively sought federal regulation and vowed to continue litigating the issue.

Pending Lawsuit

The CEO was referring to a pending lawsuit filed by Custodia against the Fed’s delayed ruling on its application for a master account. Most banks hold their reserves in master accounts at the Fed, which allows them to make transfers and settle payments.

Federal Reserve Policy Statement

On the same day, the Federal Reserve Board issued a policy statement, according to which both insured and uninsured banking institutions will be subjected to limits on certain activities, including those associated with crypto assets.

Final Thoughts

Custodia Bank’s application for membership in the U.S. Federal Reserve System was rejected due to inconsistencies with legal requirements and concerns about its proposed business model and risk management framework. Despite the disappointment and surprise expressed by CEO Caitlin Long, the bank will continue to litigate the issue. The Fed also issued a policy statement limiting certain activities of banking institutions involving crypto assets.