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Custodia Bank Application Denied by the Fed

custodia bank logo with red background and US federal reserve logo
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The US Federal Reserve has again rejected an application by Custodia Bank for membership of the Reserve System.

Despite the request for reconsideration, the central bank upheld its decision, citing the application's inconsistency with the necessary legal requirements. Meanwhile, a district court has permitted the lawsuit between this crypto firm and the Federal Reserve to proceed.

In January, the central bank denied Custodia's membership application, which it had submitted in 2019. The board allows rejected applicants to request a review of their membership status.

The Fed stated that the Custodia Bank management framework was "inadequate" when it denied the application. Furthermore, the Fed issued a joint declaration with the OCC (Office of the Comptroller of the Currency), alongside the FDIC (Federal Deposit Insurance Corporation), stating that cryptocurrencies are inconsistent with safe banking practices.

This firm seeks to join the central system to be regulated under the same rigorous standards that traditional banks must adhere to and to pave the way for other crypto banks seeking to meet these heightened standards.

Upon its first refusal, it was stated that the operational strategy entailed notable challenges to its security and stability and asserted that the company lacked an excellent system for managing risks.

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Deadline for Custodia's amended complaint set for 1 March

Firm representative Nathan Miller stated on 17 February that the central legal issue being questioned is whether the Fed had the authority to make decisions regarding master accounts and that the crypto bank had attempted to find a sensible solution before being pressured by the Fed. The judge has instructed Custodia to submit its initial amended complaint to the court before 1 March.

On 22 February, a Wyoming District Court judge denied a motion by the Fed board to dismiss a lawsuit from Custodia. The case was filed due to the central bank's delay of more than two years in providing this crypto bank with a master account.

With a master account, it could access the Federal Reserve payment systems without involving a third-party bank. The Fed rejected the master account application in January 2020, which had been submitted two years earlier in October 2018.

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