Fed Denies Membership Application for Cryptocurrency Bank Custodia

Concerned about cryptocurrency risks

The US Federal Reserve Board (FRB) announced on the 27th that it denied a membership application submitted by Custodia Bank, which provides banking services related to digital assets such as crypto assets (virtual currencies).

It argued that Custodia’s business model and its crypto-focused operations pose significant risks to its safety and soundness. The Fed justified the denial because it didn’t meet the legal requirements.

The company is a Wyoming licensed Special Purpose Depository (SPDI). Services include the operation of digital banks, the issuance of digital dollars, and custody. Custodia’s services aren’t covered by federal deposit insurance, according to the Fed.

What is SPDI

An abbreviation of “Special Purpose Depository Institutions” in the form of a financial institution in Wyoming, USA. SPDI can offer cryptocurrency services while still doing traditional banking. However, lending to customers’ fiat currency deposits is generally prohibited.

▶️Cryptocurrency Glossary

Federal Reserve membership is open to state-licensed commercial banks, if they meet the requirements. Being a member of the Fed will allow each to operate under the supervision of 12 Fed banks, giving them greater credibility with their clients.

Regarding the reason for the denial, the Fed pointed out that the company’s risk management framework is insufficient as a countermeasure against cryptocurrencies. For example, he argued that anti-money laundering (AML) and combating the financing of terrorism (CFT) are not doing enough.

Custodia issued a statement regarding the Fed’s rejection of the application. CEO Caitlin Long asserted that “we are providing cryptocurrency services that are safe and compliant with the U.S. banking system.” She also explained, “We are aggressively seeking to comply with requirements and regulations beyond those applicable to traditional banks.”

And Mr. Long pointed out that the Fed’s handling of various applications is problematic.

RelationUS Fed and others warn of risks cryptocurrencies pose to banks

Applying for a master account

The reason why he sees the Fed’s response as a problem is the application for a master account made by Custodia. Last June, the company filed a complaint in Wyoming district court against the Federal Reserve and the Kansas City Federal Reserve for delaying a decision on its application for a master account.

In order to use the system of the central bank of the United States, it is necessary to open a master account, but financial institutions such as virtual currency banks are currently difficult to grant permission to open such accounts.

In August of the same year, the Fed announced guidelines for opening master accounts, with new types of financial institutions such as companies handling virtual currencies and FinTech in mind. It states that such financial institutions will generally be subject to stricter scrutiny.

Relation: US Fed issues new guidelines for opening Fed accounts for cryptocurrency companies

In January last year, FRB Chairman Jerome Powell said, “We are carefully deliberating on allowing the SPDI to open a master account because it sets an unprecedented and serious precedent.” .

It seems that Custodia’s master account application is still pending.

Relation: Counselor of the Financial Services Agency “Virtual currency exchange business needs international rules similar to banks”