Custodia Bank Loses Appeal to Overturn Rejection of Federal Reserve System Application

The United States Federal Reserve has denied the request from the cryptocurrency-friendly Custodia Bank to reconsider its application to become a member of the Federal Reserve System. 

Crypto Isn’t Safe, Says Fed

The Federal Reserve made the denial clear in an announcement released on February 23, explaining that Custodia Bank had submitted an application inconsistent with the law’s requirements. Primarily, it was stated that the bank lacked a sufficient risk management system that would allow it to address the dangers of holding risky assets such as cryptocurrencies. 

The regulatory agency decided unanimously not to grant Custodia’s request. As a result, the company would be unable to enjoy benefits such as optimal operational flexibility and the ability to engage in specific nonbank services.

Custodia Bank has had a rough history with applications to the Federal Reserve System. The bank had initially applied for the grant in 2019, around the time it was founded. However, with the crypto space having endured its toughest winter at the time and the industry’s perception being less than stellar, it was relatively simple for the Fed to deny its request.

The Fed issued a second rejection in January 2023, claiming that Custodia’s application fell short of the legal requirements. In addition, the agency cited an earlier declaration it had made with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), which stated that cryptocurrencies are not in line with sound banking practices. As a result, companies dabbling in this space would have a more difficult time joining the Federal Reserve System.

1/ The Federal Reserve, the FDIC and the OCC just released this devastating Joint Statement on Crypto-Asset Risks to Banking Organizations. https://t.co/nvmpg0Qpf4

— Margaret Rosenfeld (@RosenfeldM) January 3, 2023

Nevertheless, Custodia remains committed to its mission to hit this milestone. The company explained in a statement that it wishes to join the Federal Reserve System so that it can be regulated under the same standards that apply to traditional banks and possibly open a pathway for other crypto banks that wish to cooperate under the same standards. As for whether it will be making another push for this, Custodia has failed to comment.  

Master Account Still in Play 

While Custodia’s application to join the Federal Reserve System remains in limbo, the bank has made some progress with a separate request – a master account.

Master accounts are unique assets that enable banks to directly access the Federal Reserve payment system without using a third party. Custodia applied for one in October 2020, but the Fed rejected it last month as well. 

Custodia had sued the Fed over the delay in granting approval for the account – a suit that the Fed attempted to dismiss since the account denial has made it moot – but it failed.

However, Custodia filed an amended complaint last week, alleging that the Fed had unlawfully singled it out and rejected its application as part of a “concentrated and coordinated” effort with the current administration on the crypto industry. The Wyoming-based bank further asked the court to overturn the decision in its entirety. 

According to a Custodia spokesperson, Nathan Miller, the complaint focuses on the core legal issue of whether the Fed even has congressional backing to decide on master accounts in the first place. He added that Custodia had been trying every avenue to find a reasonable path forward, but the Fed “forced its hand.” 

Custodia now has until March 1, 2023, to file its first amended complaint, after which the case can proceed.