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Federal Reserve says it won’t approve U.S. crypto firm’s membership

Jan. 27, 2023 Updated Fri., Jan. 27, 2023 at 7:50 p.m.

The Marriner S. Eccles Federal Reserve building is shown in Washington, D.C., in this undated photo.  (Al Drago/Bloomberg)
The Marriner S. Eccles Federal Reserve building is shown in Washington, D.C., in this undated photo. (Al Drago/Bloomberg)
Bloomberg Bloomberg

Crypto firm Custodia Bank’s application to become a member of the U.S. Federal Reserve has been denied, setting up a roadblock in the company’s bid to get coveted access to the central bank’s payment system.

“The firm’s novel business model and proposed focus on crypto-assets presented significant safety and soundness risks,” the Federal Reserve Board said in a statement Friday.

“The Board has previously made clear that such crypto activities are highly likely to be inconsistent with safe and sound banking practices.”

The Fed flagged Custodia’s risk-management framework, saying it wasn’t sufficient to address concerns “regarding the heightened risks associated with its proposed crypto activities, including its ability to mitigate money laundering and terrorism financing risks.”

Cheyenne, Wyoming-based Custodia Bank had been pushing for access to a Fed master account, which allows integration into the central bank’s payment system.

The Fed advised the firm 72 hours before its public announcement that the company could either withdraw its membership application or see it denied, Caitlin Long, Custodia’s chief executive officer, said in a statement.

“Custodia is surprised and disappointed by the Board’s action today,” she said.

Custodia, which previously used the name Avanti Bank & Trust, operates under a special state license for financial institutions that deal with digital assets including cryptocurrencies.

The firm had sued the Federal Reserve Board and the Kansas City Fed over what it alleges is a “patently unlawful delay” in processing its application for a master account.

“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 said in her statement.

She added that Custodia would continue pursuing litigation against the Fed over the handling of its applications.

Banking regulators have ramped up scrutiny of ties between the crypto industry and traditional lending following the spectacular failure of FTX – once one of the world’s largest digital-asset exchanges – after it was revealed the firm had a relationship with a number of banks.

Earlier this month, the Fed, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. issued a joint warning about the need to stem risks associated with crypto assets so that they can’t affect the broader financial system.

In addition to the Custodia denial, the Fed on Friday released a policy statement saying any lenders supervised by the central bank – whether they’re insured or uninsured – will be subject to the same limitations on activities, including novel banking activities such as those related to crypto.

The Fed noted that it has received a number of inquiries and proposals in recent years from banks about engaging in digital-asset services, which it said will be evaluated based on long-standing practice.

“Today’s action would not prohibit a state member bank, or prospective applicant, from providing safekeeping services, in a custodial capacity, for crypto-assets if conducted in a safe and sound manner and in compliance with consumer, anti-money laundering, and anti-terrorist financing laws,” the central bank said.

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