Fed denies Custodia Bank application to join the Federal Reserve System

The bank applied for the application in 2019 and sued the Fed in an attempt to speed up the decision.

The United State Federal Reserve Board has rejected Custodia Bank’s application to become a member of the Federal Reserve System. In its announcement, the Fed stated that the application was “inconsistent with the required factors under the law.” It also claimed Custodia had an “insufficient” management framework and cited an earlier joint declaration by the Fed with the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency that found crypto assets to be at odds with sound banking practices. 

STATEMENT FROM CUSTODIA BANK about today’s Federal Reserve action on its membership application. Its master account application remains pending: pic.twitter.com/QkMjcT508J

— Custodia Bank ™ (@custodiabank) January 27, 2023

In spite of the rejection, the bank’s application for a master account remains pending, the bank said in a tweet. A so-called “master account” enables a bank to make international transfers and carry out other important functions. Custodia, headed by Caitlin Long, applied for the master account in 2020 and sued the Fed over the long delay in considering the application in June.

The Fed gave the bank 72 hours to withdraw its application, Custodia said in a statement. It added, “Custodia actively sought federal regulation, going above and beyond all requirements that apply to traditional banks.”

Related: New York-based bank exits crypto after tumultuous year

The Fed only issued guidelines for granting master accounts in August, when it became clear that digital asset banks could have a difficult time receiving an account. “Institutions that engage in novel activities and for which authorities are still developing appropriate supervisory and regulatory frameworks would undergo a more extensive review,” the Fed said in a statement at the time.

BNY Mellon bank was approved by the Fed to provide crypto custody services in October, making it the first major U.S. bank to offer custody of digital assets and traditional investments on the same platform. Custodia Bank was founded in Wyoming in 2020, taking advantage of the crypto-friendly state’s 2019 opt-in custody rules for “blockchain banks.”