Federal Reserve Rejects A Crypto Bank’s Request To Join The Fed System

By Kevin • January 30, 2023 3:58 pm • Comments

It looks like crypto banks are still considered “risky” and “unsafe” by the overall traditional banking system.

Recently, the crypto bank named Custodia had filed an application to join as a member of the Fed’s system, but the application had been denied by the Federal Reserve.

The Fed cited reasons such as the fact that it considered crypto assets as risky assets that did not meet the minimum requirements for safe banking practices.

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This result had been waited on by a long time by many as Custodia had actually filed this request over two years ago and the crypto bank has stated that it will continue to explore other potential litigation options.

Many speculators within the crypto industry one day hope that crypto banks will be able to join the system as it would accelerate the mainstream adoption of digital assets.

Yahoo reports:

As a member bank, Custodia would have been regulated and examined directly by the Federal Reserve Board in addition to the Wyoming Division of Banking.

“Custodia is surprised and disappointed by the board’s action today,” Caitlin Long, CEO of Custodia, said in a statement on Friday. “The Fed advised Custodia 72 hours ago that it could either withdraw its membership application or see it denied, and the Fed denied it in record time.”

“The board’s denial is unfortunate,” Long added, “but consistent with the concerns that Custodia has raised about the Federal Reserve’s handling of its applications, an issue we will continue to litigate.”

When asked about granting master accounts for crypto firms at his confirmation hearing last January, Fed Chair Jay Powell indicated that once the central bank granted one application it would open a can of worms.

Powell had stated that the Federal Reserve was hesitant about granting these crypto banks such access as it would likely mean that it would have to start to accept all applications from many crypto banks.

As a result, the Fed may have seen that as too great of a risk for the banking system and the implications of having crypto banks is still uncertain.

This is due to the fact that there is still a lot of regulatory unclarity on how digital assets should be treated despite the fact that they are already disrupting existing financial systems at a rapid rate.

Therefore, it is critical that the banking and government sectors catchup to the change that digital assets bring if the US wants to be considered a crypto hub of the world.

It is expected that many other crypto banks will continue to apply to the Fed in the hopes that it will be accepted on day.

CoinTelegraph reports:

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.”

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