Custodia Bank Rejected by U.S Federal Reserve Over Safety & Soundness Risks
• The U.S Federal Reserve has rejected Custodia Bank’s membership application due to safety and soundness risks associated with their crypto-asset operations.
• Custodia CEO, Caitlin Long, expressed surprise and disappointment at the Board’s action.
• The bank had been waiting 18 months for the Federal Reserve Board’s response to its application to become a member.
The U.S Federal Reserve Board has rejected Custodia Bank’s application for membership in the Federal Reserve System due to safety and soundness risks associated with their crypto-asset operations. Custodia, formerly known as Avanti Bank, had submitted their original paperwork in October 2022, and had been waiting almost 18 months for a response.
Custodia CEO, Caitlin Long, expressed surprise and disappointment at the Board’s action. The Federal Reserve advised Custodia 72 hours ago that it could either withdraw its membership application or see it denied, and the Fed denied it in record time. Moreover, Custodia pursued federal regulation vigorously, exceeding all rules applicable to conventional banks.
The Federal Reserve Board stated that Custodia’s „novel business model and proposed focus on crypto-assets presented significant safety and soundness risks“ and that the bank’s risk management system was inadequate. Consequently, the Fed was unable to approve the bank’s application due to the elevated risks associated with its anticipated crypto operations, such as the company’s capacity to minimize money laundering and terrorist financing issues.
The rejection of Custodia’s application means that the bank in Wyoming has not yet received a master account, which would allow it to settle transactions with other lenders using the Federal Reserve payments system. This could have large implications for Custodia’s ability to facilitate payments and access liquidity.
Custodia’s experience is a stark reminder of the difficulties that cryptocurrencies and crypto-related businesses can face when attempting to gain regulatory approval. The Federal Reserve Board’s decision highlights the need for crypto-related companies to ensure that their risk management systems are comprehensive and up to date.