The Bank Slate


Fed denies Custodia’s membership application

The Federal Reserve has denied an application by Custodia Bank in Cheyenne, Wyo., to become a member of the Federal Reserve System.

The Fed said in a press release that it concluded that Custodia’s application “is inconsistent with the required factors under the law.”

The regulator determined that the special purpose depository institution’s business model and proposed focus on novel and untested crypto activities “presented significant safety and soundness risks.”

The Fed also found that Custodia’s risk management framework was insufficient to address concerns about the heightened risks tied to its proposed crypto activities, including its ability to mitigate money laundering and terrorism financing risks.

Custodia Bank in June filed a lawsuit against the Kansas City Fed in the U.S. District Court of Wyoming as part of an effort to have its application for a master account approved.

Custodia alleged that the regulator had “unlawfully” delayed a decision for 19 months. Custodia noted that there is a one-year statutory deadline for a response. 

Custodia claimed the Fed had been acting “in complete secrecy,” using “standardless” procedures. The delay had “forced Custodia to defer its solo entry into the financial services market in favor of a decidedly second-best and far more expensive alternative: launching with a correspondent bank,” the lawsuit claimed.

Custodia was created in 2020 by former Morgan Stanley executive Caitlin Long. The venture has raised $44 million, including $37 million in Series A funding in March 2021. 

Custodia received a routing number from the American Bankers Association in February.

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