Custodia Bank Denied Federal Reserve System Membership

The U.S. Federal Reserve Board has denied Custodia Bank’s application for membership, claiming the crypto-focused institution’s “novel business model and proposed focus on crypto-assets presented significant safety and soundness risks.”

“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,” the Fed added.

The decision comes nearly 18 months after Custodia (formerly known as Avanti Bank) first filed its application for membership in the Federal Reserve System.

“Custodia is surprised and disappointed by the Board’s action today,” Caitlin Long, Custodia’s CEO, said in a press statement. “The Fed advised Custodia 72 hours ago that it could either withdraw its membership application or see it denied, and the Fed denied it in record time.”

“Custodia offered a safe, federally regulated, solvent alternative to the reckless speculators and grifters of crypto that penetrated the U.S. banking system with disastrous results for some banks,” Long continued. “Custodia actively sought federal regulation, going above and beyond all requirements that apply to traditional banks.”

The Wyoming-based bank’s application for a master account – which gives an institution direct access to the Federal Reserve’s payment systems and thus the ability to settle transactions with other lenders via central bank reserves – is still pending. It was initially filed in October 2020.

In June 2022, Custodia filed suit against the Federal Reserve, alleging the central bank was unlawfully delaying its decision – which has a statutory deadline of 12 months – on Custodia’s application for a master account.

Read more: Republican Lawmakers File Amicus Brief in Support of Custodia Bank’s Legal Battle With the Federal Reserve