• The U.S. Federal Reserve Board has rejected the attempt of Custodia Bank to become a member of the Federal Reserve System.
• The Federal Reserve Board argued that the business model proposed by Custodia Bank presented significant safety and soundness risks due to its focus on crypto activities.
• The Federal Reserve Board concluded that the bank’s application was inconsistent with the required factors under the law.
The U.S. Federal Reserve Board has denied Custodia Bank’s application to become a member of the Federal Reserve System. Custodia is a special purpose depository institution which does not have federal deposit insurance, and wishes to engage in „untested crypto activities,“ including issuing a crypto asset. The Board determined that such activities are highly likely to be inconsistent with safe and sound banking practices.
In a statement released Friday, the Federal Reserve Board explained that the Custodia Bank’s business model presents significant safety and soundness risks. The Board noted that the firm’s risk management framework was not sufficient to address relevant concerns, such as the ability to mitigate money laundering and terrorism financing risks. Furthermore, the Board argued that the application, as submitted by the company, is „inconsistent with the required factors under the law.“
The Federal Reserve Board further detailed that Custodia’s focus on crypto activities is untested, and that the novel business model presented safety and soundness risks. The Board concluded that, due to the risks presented, the application was inconsistent with the required factors under the law and that the order will be released following a review for confidential information.
Custodia Bank’s attempt to become part of the Federal Reserve System was ultimately unsuccessful. Membership in the Federal Reserve System would have given Custodia, a bank chartered by the state of Wyoming, a number of benefits. These include access to the Federal Reserve’s payments system, the ability to borrow from the central bank, and access to a variety of financial services. However, the Federal Reserve Board ultimately decided that the risks posed by Custodia’s business model were too great.