Fed Rejects Custodial Bank’s Bid to Join the Federal Reserve System

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The failure of Custodia Bank to meet up with the expected and necessary laws of the Federal Reserve System has caused its denial to become a member of the Reserve system by the United States Federal Reserve Board.

According to a release on January 27, the denial was a result of the financial firm’s inability to submit a regulated and consistent application in line with the required factors. The Fed also noted that the Wyoming-based firm lacked adequate risk management control to mitigate the risks associated with crypto, not excluding crypto’s use in money laundering and terrorist financing activities.

The Federal Reserve Board in the release said “the digital asset bank’s novel business model and proposed focus on crypto-assets presented significant safety and soundness risks.” 

As such, the board noted that such crypto activities tend to be inconsistent with the bank’s daily safe and sound practices. 

In response to the Board, Caitlin Long, Custodia Bank CEO said the bank was not only surprised but also disappointed at the board’s action. Caitlin further said the bank has actively sought federal regulation and has done everything best possible to have all the requirements that apply to traditional banks. Yet, the bank still got a denial. 

Recall that in June the bank took legal action against the Federal Reserve Board and the Federal Reserve Bank of Kansas City to force the organizations to issue a decision on its application to access the Fed master accounts after unlawfully delaying it from access for 19 months. If granted access, the digital asset bank will be able to access the Fed Reserve payment system rather than passing through an intermediary bank.

Financial Institutions Embracing Crypto Services

According to an earlier report, more traditional financial institutions are venturing into crypto-related services. These organizations, especially the more established ones, begin custodial services and then advance into more crypto-native offerings.

For example, earlier in October 2022, the Fed cleared BNY Mellon to provide crypto custody services. The 238-year-old bank now allows institutional clients to hold and transfer Bitcoin (BTC) and Ethereum (ETH) after it partnered with Fireblocks and Chainalysis to provide this service.

Equally, the US-licensed global digital bank FinTech Ventures (FV) launched its digital assets custody service. With the launch, its users can store, transfer as well as sell BTC and fiat currency within a single account.

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