At a time when regulators are scrutinizing the crypto industry like never before, digital assets bank Custodia hoped the U.S. government would welcome its compliance-first business strategy. The central bank saw it differently, however, and rejected the Wyoming-based bank's application for membership in the Federal Reserve System.
“The firm's novel business model and proposed focus on crypto-assets presented significant safety and soundness risks,” said the Federal Reserve in a press release.
Caitlin Long, CEO and co-founder of Custodia, decried the Fed’s decision and reaffirmed the validity of her application. “Custodia offered a safe, federally-regulated, solvent alternative to the reckless speculators and grifters of crypto that penetrated the U.S. banking system” she said in a statement posted to Twitter.
STATEMENT FROM CUSTODIA BANK about today's Federal Reserve action on its membership application. Its master account application remains pending: pic.twitter.com/QkMjcT508J
— Custodia Bank ™ (@custodiabank) January 27, 2023
Membership in the Federal Reserve System allows any state-chartered bank access to tax benefits, investment opportunities, and other conveniences. But what was maybe even more important for Custodia was the potential for a substantial public relations win, a chance to show cryptocurrency’s increasing acceptance at the highest levels of government.
The denial of Custodia is yet another example of the federal government’s increasingly assertive approach to crypto in the past few months, as the SEC and DOJ have launched primetime investigations into the now-bankrupt cryptocurrency exchange FTX, and Congress has treated cryptocurrency regulation as a hot-button issue
And Long, a veteran of Wall Street who has helped pass 24 crypto-friendly laws in Wyoming as of 2021, was not deterred by the Fed’s decision. “The Board’s denial is unfortunate but consistent with the concerns Custodia has raised about the Federal Reserve’s handling of its applications, an issue we will continue to litigate,” she said in her statement.
Long's comment refers to a lawsuit that Custodia brought against the central bank over the Fed's long delay in ruling on Custodia's application for a master account—a key permission that lets banks transfer funds with each other and the Fed directly favorable rates. In its complaint, Custodia asked a federal judge not only to process its application but to give it a favorable ruling. Long's comment suggests the company will litigate the merit of this week's decision by the Fed.
Despite the denial of Custodia’s application, the Fed said in an accompanying press release that it was open to granting membership to banks who hold crypto assets if their safekeeping services are “conducted in a safe and sound manner and in compliance with consumer, anti-money laundering and anti-terrorist financing laws.”
