U.S. Federal Reserve Denies Crypto Bank’s Membership Application

Custodia had sued the Fed last June for delaying the master account process.

Custodia Bank – a leading digital asset banking institution based in Cheyenne, Wyoming – has faced a roadblock in its application for a Federal Reserve master account, as the Fed recently denied its application in an official press release today. The rejection comes two years after Custodia filed for the master account.

According to the Federal Reserve, it denied the membership application due to observed inconsistencies with regard to the required factors established by the law. These inconsistencies are due to Custodia’s focus on crypto. Despite disclosing in 2021 that it does not plan to ban cryptocurrencies, the Fed has had a reserved stance on the asset class.

“The firm proposed to engage in novel and untested crypto activities that include issuing a crypto asset on open, public, and/or decentralized networks. The firm’s novel business model and proposed focus on crypto-assets presented significant safety and soundness risks. The Board has previously made clear that such crypto activities are highly likely to be inconsistent with safe and sound banking practices,” the press release reads.

The central bank also mentioned that its Board discovered that Custodia’s risk management system is not sufficient enough to address the risks associated with handling a crypto-focused money-deposit system, especially in the areas of terror financing and money laundering.

A Federal Reserve master account is a type of account that is held by a depository institution (such as a bank or credit union) at one of the 12 Federal Reserve Banks. These accounts are used by the institution to conduct transactions and directly access the Federal Reserve without the need for an intermediary institution.

Custodia’s Tussle with the Federal Reserve

Custodia was formed by Wall Street veteran Caitlin Long. Formerly called Avanti, the bank applied for the master account in October 2020, but its application had since then been delayed by the central bank. The delay persisted despite Custodia’s procurement of a routing number in February of last year.

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Custodia had to sue the Federal Reserve last June for what it called an unnecessary delay and a violation of the established one-year statutory deadline for processing the application. Custodia noted, in the suit, that a master account application usually takes five to seven working days to get processed.

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