Federal Reserve Denies Digital Asset Bank Custodia’s Application

The Federal Reserve Board has denied digital asset bank Custodia Bank’s application.

The Fed said in a Friday (Jan. 27) press release that the Wyoming-based digital asset bank’s submitted application to become a member of the Federal Reserve System was inconsistent with factors required under the law. It noted that Custodia Bank does not have federal deposit insurance and proposed to engage in “novel and untested” crypto activities.

“The firm’s novel business model and proposed focus on crypto-assets presented significant safety and soundness risks,” the Federal Reserve Board said in the release. “The Board has previously made clear that such crypto activities are highly likely to be inconsistent with safe and sound banking practices.”

The Federal Reserve Board also said in the press release that it found that Custodia Bank’s risk management framework was insufficient to address concerns around mitigating money laundering and terrorism financing risks.

In a statement on the action, Custodia Bank CEO Caitlin Long said the bank was “surprised and disappointed” and that the board had told the bank 72 hours earlier that it could either withdraw its action or see it denied.

“Custodia offered a safe, federally-regulated, solvent alternative to the reckless speculators and grifters of crypto that penetrated the U.S. banking system, with disastrous results for some banks,” Long said in the statement. “Custodia actively sought federal regulation, going above and beyond all requirements that apply to traditional banks.”

Long added that Custodia has raised concerns about the board’s handling of its applications, that the board’s denial is consistent with those concerns and that the bank will continue to litigate those issues.

Custodia Bank took legal action against the Federal Reserve Board and the Federal Reserve Bank of Kansas City in June to force the institutions to issue a decision on its application to access the Fed’s Master Accounts.

The bank argued that the institutions had “unlawfully” delayed for 19 months a decision to grant it access.

“Despite regular meetings and thousands of pages of responses to various inquiries, more than 19 months have passed without a decision on Custodia’s master account application, and no assurance has been provided that a decision is forthcoming at all, let alone in the near future,” Custodia said in its legal filing.