Crypto-friendly Custodia Bank faces setback as Fed denies application for oversight

The crypto-friendly Custodia bank, founded by Caitlin Long, a well-known figure in the crypto industry, has had its application to come under the supervision of the US Federal Reserve (Fed) rejected, according to an official announcement.

The board had previously announced a rejection of the application. Still, the announcement confirmed that the order outlining the decision was not immediately available because of the need to review it for confidential information.

Fed’s decision based on Custodia’s ties with Crypto?

The Federal Reserve Board’s order notes “concerns” about Custodia Bank’s proposed business plans, which focus exclusively on the crypto sector. The board believes that banks with business plans focused on a narrow sector of the economy may pose an increased risk, as they may be more “sensitive” to economic or regulatory challenges.

Furthermore, the recently released denial from the Fed notes that the Board’s concerns are further heightened regarding Custodia Bank. The financial institution believes that the crypto-friendly bank is an “uninsured depository institution”, not backed by the Federal Deposit Insurance Corporation (FDIC), and may pose greater risks to depositors and the overall financial system.

Additionally, according to the released Fed denial of the crypto-friendly bank, Custodia Bank proposed issuing Avits, which are dollar-denominated tokens designed to act as a programmable “electronically negotiable instrument” and as deposits for federal banking purposes. law.

According to the Fed press release, they note that Custodia Bank does not refer to Avits as “stablecoins” but that they will likely function similarly to stablecoins such as Tether USDT and USDC.

This proposed issuance of Avits by Custodia Bank may have been seen as a potential risk by the Fed, given the concerns surrounding stablecoins and their potential use for “illicit purposes.”

Custodia Bank’s response to the Fed

Following the Fed’s repeated conclusion, Custodia Bank issued its response. The financial institution and its founder Caitlin Long made several claims about the need for fully solvent banks and the Federal Reserve’s handling of bank-driven risks and the crypto industry.

Custodia Bank proposed a model that would hold $1.08 in cash to back every dollar that customers deposit, which could be seen as a more conservative and risk-averse approach to banking.

Custodia Bank’s statement also highlights that there is a great need for fully solvent banks equipped to serve “rapidly changing” industries in an era of rapidly improving technology, citing the need for banks to adapt to customer demand and changes in industries such as fintech and cryptoassets.

The Custodia Bank statement also suggests that Custodia has not been deterred by what it perceives as coordinated “attacks” and press leaks of confidential information from the Fed.

The notice also suggests that the recently issued order denying Custodia Bank’s application for membership in the Federal Reserve System was the result of a number of procedural “abnormalities, factual inaccuracies and a general bias against the crypto industry.”

In addition, the claims by Custodia Bank suggest that the bank may have to go to court to defend its rights and force the Fed to “follow the law” in response to the rejection of its application for membership in the Federal Reserve System.

Featured image from Unsplash, chart from TradingView.com