Bloomberg
Custodia Bank’s offer to gain access to the Federal Reserve’s payment system received a heavy blow on Friday morning.
The Federal Reserve Board of Governors has rejected the Wyoming-based digital asset bank’s application to be a state member bank on the grounds that its “untested” business model is too risky.
Custodia had sought membership in the Fed, a status that would have made the Board his primary overseer, along with his two-year effort to obtain a purported master account with the Federal Reserve Bank of Kansas City.
The Custody account application is the subject of a heated lawsuit between the bank, the Board of Governors and the Kansas City Federal Reserve.
In its decision on Friday, the Board cited concerns about Custody’s business model, which focuses on providing custody services for cryptocurrencies and other digital assets, and aims to include issuing its own stablecoin. The Board questioned the company’s ability to manage risks related to money laundering and illicit finance.
“The company’s novel business model and proposed focus on crypto assets presented significant safety and soundness risks,” the Fed statement read. “The Board has previously made clear that such crypto activities are highly likely to be inconsistent with safe and sound banking practices.The Board also found that Custodia’s risk management framework was insufficient to address concerns about the increased risks associated with the proposed crypto activities, including its ability to mitigate money laundering and financing risks of terrorism”.
Custody CEO Caitlin Long said, in a written statement, that she was “shocked and disappointed” by the decision, adding that her company received 72-hour notice that it could “withdraw your membership application or see it denied.” .
By preventing Custody from being regulated by the federal government, Long said, the Fed was missing an opportunity to bring digital asset servicing into the regulatory perimeter and, in doing so, resolving to keep much of the sector’s activities in the shadows.
“Custodia offered a safe, solvent, and federally regulated alternative to reckless speculators and cryptocurrency scammers who penetrated the US banking system, with disastrous results for some banks,” Long said. “Custodia actively sought federal regulation, going beyond all the requirements that apply to traditional banks. The Board’s refusal is unfortunate but consistent with concerns Custodia has raised about the Fed’s handling of applications. Federal, an issue we will continue to litigate.”
The Board of Governors declined to comment on how the decision might affect the ongoing litigation.
The Board’s assessment of Custody’s risk management practices could be damning, but it doesn’t end the bank’s push for a master account. Fed policy states that such decisions must be carried out by regional reserve banks – the Kansas City Fed, in this case.
Still, the Board’s decision prevents Custodia from getting an easier pass from the Kansas City Fed. Under the Federal Reserve recently enacted With a three-tier system for evaluating account applications, state-chartered banks that are not federally insured or supervised, such as Custodia, face the most scrutiny. If Custody had gained membership, the Board would have become his primary overseer, taking him to the second least vetted tier of applicants.
Along with its decision on the Custodian membership application, the Fed Board also issued a policy statement intended to standardize the scrutiny applied to federally supervised banks seeking to engage in crypto or other novel business practices, regardless of whether or not they had federal deposit insurance.
The policy is intended to create equal standards for Fed-regulated state member banks and federally insured domestic banks supervised by the Office of the Comptroller of the Currency. It specifies that all companies must have risk management processes, internal controls and information systems suitable for the activities in which they are involved.
“The statement also clarifies that insured and uninsured banks supervised by the Board would be subject to the limitations on certain activities imposed on national banks, which are supervised by the Monetary Comptroller,” the Board said in a press release. . . “Equal treatment will promote a level playing field and limit regulatory arbitrage.”
The statement notes that banks are not prohibited from providing custody services for crypto assets, but notes that institutions engaged in such activity must comply with best practices for safety and soundness, as well as all applicable laws related to money laundering. money, terrorist financing and consumer protection.
While the Federal Reserve and other banking regulators have not produced specific regulations on banks’ engagement with crypto assets and companies, such activities have been the subject of intense supervisory oversight. Earlier this month, the Federal Reserve, OCC, and Federal Deposit Insurance Corporation issued a joint statement calling on banks to expect more of the same.
