The Bank Slate


Fed again rejects Custodia request for supervision

The Federal Reserve Board has rejected a request by Custodia Bank to reconsider last month’s decision to deny the Cheyenne, Wyo., company’s application to be supervised by the Fed.

The Fed rejected Custodia’s application after concluding that it was “inconsistent with the required factors under the law.” The regulator determined that the 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 filed a lawsuit against the Kansas City Fed in June in an effort to have its application for a master account approved.

Custodia alleged that the regulator had “unlawfully” delayed a decision for months, noting 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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