The Federal Reserve on Friday rejected the Wyoming-based crypto-focused bank’s application to become a member of the central bank’s proprietary payments system.
In a press release, the Fed said the company’s proposed business plan, and its focus on crypto-assets, presents significant safety and health risks.
The bank, called Custodia, has no federal deposit insurance. The company describes itself as a “special purpose depository institution”.
It told the Fed that it plans to engage in activities including issuing crypto assets on decentralized networks, according to a press release from central bank.
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Custodia, formerly known as Avanti, uses a special state license from Wyoming for banks to handle cryptocurrencies. In 2022, Avanti sued the Federal Reserve Bank of Kansas City for delaying a decision to grant them special access to the Fed, known as the primary account.
Caitlin Long, Custodia’s chief executive officer, said in a statement: “Custodia is surprised and disappointed by the Board’s actions today. “The Board’s refusal is regrettable but consistent with concerns Custodia has raised about the Federal Reserve’s handling of its applications, an issue that we will continue to litigate. .”
Recently, The Fed emphasized that crypto activities are not consistent with safe and sound banking practices, as demonstrated by the significant volatility in the crypto industry over the past year.
“We do not see this decision as a surprise. For us, the Fed wants to prevent countries that hire crypto-enabled institutions from being able to access the Fed’s payment systems and liquidity programs,” said Jaret Seiberg, executive director of the research group. Washington-based research firm Cowen, said in an email to MarketWatch.
“We believe this explains why it blocked Custodia from becoming a member state bank and why it made a broader policy statement. We do not expect the Fed to grant Custodia a Master Account,” he added.
The primary account allows companies to access the Fed’s payment systems and payment services. Several state-chartered crypto companies have registered master accounts to allow for more seamless transitions between cryptocurrencies and official currencies, according to the Congressional Research Service, a major research group. Public books operate in the Library of Congress.
“Once you have a master account, you have access to the Fed facilities and,” said Dennis Kelleher, President and CEO of Better Markets, an anti-financial deregulation group. two things happen. “One is that it is a legitimized operation and many others will do business with you when you get external confirmation from the Fed for your financial activities. and that allows them to market those activities to more people and increase their revenue.”
The other thing, Kelleher said, is that once you connect with the Fed, the banking authorities are in a position where when a company’s operations reach critical mass, the central bank takes care of not fail because of the collateral consequences of that. Fail.
In a seperate But in relation to Friday’s move, the Fed also released a policy statement with the goal of encouraging a level playing field for all banks with a federal regulator, regardless of insurance status. deposit insurance.
Usually, the Federal Deposit Insurance Corporation provides insurance to protect bank accounts if the bank fails. Federal Reserve announced on Friday indicated that uninsured and insured banks under Board supervision would be subject to similar restrictions on operations.
Banks will need to demonstrate in their application that the activities in which they are engaged are authorized by law and that there are “appropriate and adequate” risk management processes, internal controls and other measures in place. sufficient with respect to the nature, scope and risks of that bank’s activities”. , according to the statement.
“The crypto industry and its political allies have been trying to reach and connect with the core of the banking system because that would be extremely lucrative for them,” said Kelleher. “Kelleher said. He added that the failure of Custodia would be a disappointment for the crypto industry.
“The point is, once you’re connected to the banking system, the risks in your business, including the one the Fed has pinpointed here – new and unregulated activities certificates – they will be integrated and connected to the banking system. We saw this with subprime mortgages before the 2008 crisis.”
