The United States Federal Reserve Board rejected Custodia’s request to join the central bank as a member of its payment system. The news notes a blow to the cryptocurrency industry as it aims to receive more mainstream acceptance.
The Federal Reserve stated in a press release that Custodia’s business plan and crypto assets focus could lead to significant “safety and soundness risks.” It also did not receive federal deposit insurance.
According to Custodia, it is a “special purpose depository institution.”
The Reserve explained further,
“The Board has previously made clear that such crypto activities are highly likely to be inconsistent with safe and sound banking practices. The Board also found that Custodia’s risk management framework was insufficient to address concerns regarding the heightened risks associated with its proposed crypto activities, including its ability to mitigate money laundering and terrorism financing risks.”
Reports show that Custodia used a Cheyenne, Wyoming-based special state licence to issue cryptocurrencies. Formerly Avanti, Custodia later filed a lawsuit against the Kansas City Federal Reserve Bank, citing claims the latter delayed a crucial decision to access the Fed as a master account.
Master accounts provide firms with access to payment systems linked to the Federal reserve. This allows streamlined transactions when switching from cryptocurrencies to fiat currencies.
Caitlin Long, Custodia’s chief executive, responded: “Custodia is surprised and disappointed by the Board’s action today. The Board’s denial is unfortunate 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.”
Federal Reserve Cautions against Crypto Deposits
The news comes after the Fed previously dismissed cryptocurrencies as having safe and sound banking practices. Michael Barr, Federal Reserve vice chair of supervision, stated that banks accepting crypto firm deposits could face increasing liquidity risks.
Barr explained that the Fed was working jointly with the US Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. Doing so would allow the Fed to warn the finance sector of the risks linked to moving to deposits in the crypto industry. He added banks may face massive deposit fluctuations due to price swings across cryptocurrencies.
