The Federal Reserve has opposed Custodia Bank’s bid to join the Federal Reserve System, stating its disapproval and providing reasons for its rejection. The Fed has been forceful in its response, asserting its position.

On Friday, the Federal Reserve released an extensive eighty-six-page document outlining significant reservations regarding Custodia Bank’s approach. The document suggests that there are fundamental concerns that the Fed has regarding the bank’s strategies and methodologies.

Custodia Bank, previously referred to as Avanti, is a specialized depository institution that operates under the state charter of Wyoming. The bank has applied for membership in the Federal Reserve System, seeking to acquire a Federal Master wallet. This move would enable Custodia to access a broader range of services and gain more credibility in the banking industry.

Despite Custodia Bank’s registration for membership in the Federal Reserve System and its desire to acquire a Federal Master wallet, the Fed ultimately rejected the registration in January 2023 after a lengthy eighteen-month review process.

Following the Fed’s decision, Custodia filed a lawsuit against the regulatory body in June 2022 over its handling of the master account application. As of now, the lawsuit remains unresolved.

Federal Reserve Provides Detailed Explanation for Custodia Bank’s Membership Rejection

When the application was initially rejected, the Federal Reserve cited the significant risks associated with Custodia Bank’s business model and inadequate risk management structure as the main reasons for the rejection.

However, the Fed has now provided a more detailed explanation for its decision, delving further into the underlying concerns and factors that led to the rejection. The Federal Reserve has identified four categories under which it has classified the reasons for Custodia Bank’s rejection.

These categories are financial, convenience, corporate powers, and organizational needs. Additionally, the Fed has stated that Custodia Bank lacks sufficient risk management structure and controls suitable for the cryptocurrency industry it serves, which was a major factor in its rejection.

While acknowledging that Custodia Bank seems to have adequate resources and capital to uphold initial operations,” the Federal Reserve expressed concerns regarding the sustainability of the bank’s business model due to its vulnerability to volatility.

In addition, the Fed questioned whether the bank’s current risk management and control approach would be adequate for potential market disruptions and other unforeseen events.

The Federal Reserve has stated that Custodia Bank’s business plan may threaten the cryptocurrency community, a significant concern for the regulatory body. Therefore, the Fed has rejected the bank’s application without prejudice, indicating that it may reapply if it can address the concerns and risks identified by the Fed.

Custodia Bank Responds to Federal Reserve’s Rejection

Custodia Bank has responded to the Federal Reserve’s rejection, asserting that its business model is designed to prevent the type of bank operations recently by establishing a complete solvent bank that serves rapidly evolving industries.

The bank’s statement indicates that it sees its approach as a necessary and valuable contribution to the banking sector, particularly in light of the unique risks and challenges the cryptocurrency industry poses.

Custodia Bank has criticized both the Federal Reserve and the Kansas City Reserve Bank for handling its application and has accused them of engaging in “coordinated attacks” and leaking confidential information about the bank to the media.

The bank’s statement suggests that the recent release by the Fed results from procedural irregularities, factual inaccuracies that the bank claims were not corrected, and general discrimination against crypto assets. Overall, the bank is strongly disputing the reasons given for the rejection and is expressing its belief that the regulatory bodies have unfairly targeted it.