Federal Reserve denies membership to crypto adjacent bank Custodia

The Federal Reserve Board on Jan. 27 denied an application by Custodia Bank Inc. to become a member of the Federal Reserve System.

The move comes amidst increasing regulatory scrutiny from the highest levels of the US federal government in the wake of industry-wide scandals like FTX and Genesis, which wiped away billions of dollars of retail and institutional investors’ money in 2022. 

The Board found that “Custodia’s risk management framework was insufficient to address concerns regarding the heightened risks associated with its proposed crypto activities, including its ability to mitigate money laundering and terrorism financing risks,” according to the press release.

Custodia is a chartered bank registered in Wyoming that describes itself as “a bank formed to be a compliant bridge between digital assets and the U.S. dollar payments system, and a custodian of digital assets.”

Though they are not regulated by the Federal Deposit Insurance Corporation (FDIC), the bank issued an application in 2019 to obtain what is known as a “master account” license with the Federal Reserve, which would have allowed it to carry out international transfers and other important functions needed to clear crypto hurdles. 

The move comes on a busy day for US federal government agencies, which also saw an economic roadmap for regulating cryptocurrencies by members of the Biden administration, which, in part, addressed the misinformation regarding crypto and FDIC. 

“Custodia is surprised and disappointed by the Board’s action today,” said Caitlin Long, CEO of the company. “Custodia offered a safe, federally regulated, solvent alternative to the reckless speculators and grifters of crypto that penetrated the US banking system,” Long added. “Custodia actively sought federal regulation, going above and beyond all requirements that apply to traditional banks […] we will continue to litigate.”