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The board of governors of the Federal Reserve System, better known as the Fed, has officially confirmed that they denied Custodia their application to be part of its network.

The Fed is concerned about Custodia’s abilities

In an updated statement on Mar. 24, the United States central bank said they were concerned about Custodia’s business model. 

Earlier in January, the Fed released a statement saying they denied the bank their application because they concentrated on one facet of the economy, presenting “safety and soundness risks.” 

Now, according to this week’s report, the Fed claimed that Custodia’s operations were inconsistent with the “required factors under the law,” placing doubts on the bank’s ability to curb, among other risks, money laundering.

Custodia is a crypto-focused bank that continues to be regulated by Wyoming state laws. Operating as a special purpose depository institution (SPDI), Custodia can legally custody digital assets on behalf of its clients, including institutions. 

The Catlin Long-founded bank had applied to be part of the Fed and wanted to be assigned a master account in their application in October 2020. 

There were delays that forced Custodia to move to court, suing the Fed. The case will continue despite the Fed barring them from accessing the FedWire. Custodia is pressing for damages in this suit, arguing the Fed might have mishandled the case after U.S. District Judge Scott Skavdahl denied a motion for the lawsuit to be dismissed. 

Typically, non-crypto banks seeking access to the Fed master account would receive feedback within days. Custodia had to wait over two years before the Kansas City Fed decided. The bank claims there was a conspiracy by the Fed to block it all along.

Approval would have benefited crypto

If Custodia had been allowed to be part of the FedWire, it would have joined other financial institutions regulated by the central bank. 

The FedWire system is expressly designed to facilitate the transfer of bulk transactions. Accordingly, with this facility, Custodia could quickly shift big transfers from clients without requiring an intermediary, offering competitive rates since they won’t have to pay intermediation fees. 

In recent weeks, United States agencies have been cracking the whip on crypto companies, including banks. Silvergate Bank filed for voluntary liquidation while the Federal Deposit Insurance Corporation (FDIC) took over Silicon Valley Bank (SVB) assets after a bank run.

Meanwhile, New York regulators shut down Signature Bank, citing a crisis in confidence in the platform’s leadership.

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