Fed Rejects Application For Membership By Custodia Bank Because Inconsistent With Safe
- The application for membership by Custodia Bank has been rejected by the American Federal Reserve Board.
- The Fed claimed the crypto-focused institution’s novel business model and proposed focus on crypto-assets presented significant safety and soundness risks.
- The Board also found that Custodia’s risk management framework was insufficient to address concerns regarding the heightened risks associated with its proposed crypto activities.
The U.S. Federal Reserve Board announced on Friday that it rejected the application of Custodia Bank, Inc. (formerly known as Avanti), a digital asset bank located in Cheyenne, Wyoming, to become a member of the Federal Reserve System.
After the rejection, Custodia will not be able to access the Federal Reserve Payments System. The Fed believes that the application submitted by the company does not meet the requirements required by law. Experts say Custodia’s failure will disappoint the crypto industry.
Custodia is a special purpose depository institution chartered by the state of Wyoming with no federal deposit insurance. The company proposes to engage in novel and untested crypto activities, including issuing crypto assets on open, public, and/or decentralized networks. The company’s novel business model and proposed focus on cryptoassets pose significant safety and sound risks.
The Federal Reserve has previously made it clear that such cryptographic activities are highly likely to be inconsistent with safe and sound banking practices. The Fed also found that Custodia’s risk management framework was insufficient to address concerns about increased risks associated with its proposed crypto activities, including its ability to mitigate money laundering and terrorist financing risks.
Previously, the US Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency said they were closely observing the cryptocurrency operations of banking institutions.
The regulators highlighted a few red flags for those wishing to go deeper into crypto-related activities, even if the statement noted that banks aren’t forbidden from doing business with organizations that operate within the law.
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