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Federal Reserve Slams Custodia Bank, Says it Endangers Crypto Industry and Itself

2 mins In Brief

  • The Federal Reserves has detailed why it rejected Custodia’s bank application.
  • Custodia countered that its model prevents the kind of bank run that recently bedeviled the banking industry.
  • The bank further claimed the Feds statement showed its general bias against digital assets.
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 Federal Reserve Slams Custodia Bank, Says it Endangers Crypto Industry and Itself

The Federal Reserve (Fed) has come out all guns blazing against Custodia Bank’s attempt to become a member of the Federal Reserve System, as it criticized the proposal and justified its rejection.

In an 86-page document released on Friday, the Fed claimed there are fundamental concerns about Custodia’s approach. 

Custodia Bank, formerly known as Avanti, is a Wyoming state-chartered special depository institution. It applied to become a Federal Reserve System member and obtain a Federal Master account. 

But the Fed rejected the application for membership in January 2023 after 18 months. Custodia filed a lawsuit against the Fed in June 2022 over its master account application which is still pending.

Fed Gives Detailed Reasons for Rejection

At the time of the rejection, the Fed stated that it rejected the application because of the significant risks surrounding the business model and insufficient risk management systems. Its new statement delved further into explaining those reasons.

According to the Fed, its reason for rejection can be classified under four headings. These are managerial factor, financial factor, corporate powers factor, and convenience and needs factor. It added that Custodia does not have adequate risk management systems and control suitable for the crypto industry that it chooses to serve. 

“Those concerns are further elevated with respect to Custodia because it is an uninsured depository institution seeking to focus almost exclusively on offering products and services related to the crypto-asset sector, which presents heightened illicit finance and safety and soundness risks.”

Although the Fed admitted that the bank “appears to have sufficient capital and resources to sustain initial operations,” it questioned its sustainability saying its business model is vulnerable to volatility. 

Notably, the banking regulator said that Custodia’s business plan might even pose a risk to the crypto community. Hence, its decision to reject it without prejudice.

Custodia Responds

However, Custodia has fired back at the Fed. Its statement noted that the bank model seeks to prevent the kind of bank runs that recently happened by establishing a fully solvent bank meant to serve fast-changing industries.

It criticized the Fed and Kansas City Reserve Bank for not approving its application and what it termed as “coordinated attacks and behind-the-scenes press leaks of confidential Custodia information.”

The bank concluded that the recent Fed release is a “result of numerous procedural abnormalities, factual inaccuracies that the sod refused to correct, and general bias against digital assets.”

No Room for Crypto?

Meanwhile, the Fed statement will likely add more fuel to the fire of conspiracy theories about the Biden administration trying to de-bank the crypto industry. The Fed release is the longest order in the bank’s history and gives an idea of the Fed’s view on stablecoins. 

It mentioned that allowing Custodia-issued stablecoin AVIT to be deposited into a Fed master account might give the token some form of backing. Enabling it to scale quickly and gain more users globally.