Federal Reserve’s Board Denies Access to Custodia

It has been a while since when Custodia i.e. a crypto bank has been trying to obtain membership in the US Federal Reserve’s network.

The decision has now been taken by the Board of Directors of the US Federal Reserve. The Board’s decision was subsequently announced on 27th January 2023 through a press release.

According to Board’s decision, Custodia has been refused to become part of the network as a chartered member.

The Board concluded that Custodia’s application was ‘inconsistent’ particularly with regard to a number of required formalities as prescribed by law.

The reasoning behind Refusing Membership

As per the Federal Reserve’s press release of 27th Jan 2023, Custodia cannot be regarded as a financial institution.

Instead, it can at best be regarded as a ‘special purpose institution’ in which even the ‘federal deposit insurance’ is also lacking, explained the Board.

The Board was of the further view that Custodia aims at interacting with crypto activities whose activities so far remained ‘untested’.

It further pointed out the applicant also wishes to introduce crypto products which products also have not been tested.

While examining the Board’s determination, shows that the Board has raised several questions, particularly with regard to Custodia’s business model.

However, Board appreciated Custodia for preparing a role-model plan which took into account and addressed crypto problems such as safety and risks.

Board’s Stance Regarding Digital Assets

US Federal Reserve’s Board’s stance towards digital assets has been quite firm for the past many years. Several times, Board has reminded us that crypto activities are not meant for coping with conventional banking practices.

The Board strongly believes that conventional banking practices are sound and safe as compared to crypto practices.

However, Board has stated several times that even the banking sector’s risk management policies are not at par with the required standards.

For instance, the Board is concerned that the banks are not prone to money laundering and activities such as funding terrorism.

The Board pointed out that the preventive measures adopted by banks are insufficient in preventing such activities.

The crux of the Board’s Decision

Based on the reasons explained in the press release, Federal Reserve’s Board denied membership to Custodia.

The application of Custodia was hence returned on the grounds of ‘inconsistency’ with the relevant laws.

Meanwhile, the Board has informed us that the final order hasn’t been handed over to the application which shall be provided in due course.

The Board was of the view that currently the decision will be further reviewed after which it shall be officially released. They will be taking their time to deal with the matter and go through the review process.

What Custodia Has Missed

Custodia was more than desperate to come into the network of the US Federal Reserve. However, the dream of the crypto bank has been destroyed for the time being.

If the Board has accepted the application, then Custodia would have earned chartered membership alongside other member banks under Federal Reserve.

The bank also couldn’t enjoy further benefits such as taxation, investment, etc. The bank has not been accepted and inducted into the network of the banks.

This would have allowed the bank to be able to operate as an investment entity as well as implement taxation.

Caitlin Long, Custodia’s CEO, said that she wasn’t expecting such a determination by the Board of the US Federal Reserve.

She tweeted that Custodia is a standout institute in the crypto industry that can ensure safe and risk-free exposure to crypto assets. She said that the bank would wait till the release of the final verdict.

Caitlin is still hoping that while reviewing, the Board may be able to reverse its decision. The bank may have its fate changed as the board may come to the conclusion that it must be allowed to operate.