Fed details why it rejected Custodia application
The Federal Reserve (Fed) has come out with all guns blazing against Custodia Bank’s bid to become a member of the Federal Reserve System, as it criticized the proposal and justified its rejection.
In an 86-page document released on Friday, the Fed argued that there are fundamental concerns about Custodia’s approach.
Custodia Bank, formerly known as Avanti, is a Wyoming state-chartered special depository institution. It applied to join the Federal Reserve System and obtain a Federal Master account.
But the Fed rejected the application for membership in January 2023 after 18 months. Custodia filed a lawsuit against the Fed in June 2022 over the master account application that is still pending.
The Fed provides detailed reasons for rejection
At the time of the rejection, the Fed stated that it rejected the application due to the significant risks surrounding the business model and inadequate risk management systems. The new statement delved further into explaining these reasons.
According to the Fed, its reason for rejection can be classified under four headings. These are the management factor, the financial factor, the company’s power factor and the convenience and need factor. It added that Custodia does not have adequate risk management systems and controls suitable for the crypto industry that it chooses to serve.
“These concerns are further heightened with respect to Custodia because it is an uninsured custodian institution that seeks to focus almost exclusively on providing products and services related to the crypto-asset sector, which presents increased illicit finance and safety and soundness risks.”
Although the Fed admitted that the bank “appears to have sufficient capital and resources to sustain the initial operation”, it questioned its sustainability, saying the business model is vulnerable to volatility.
In particular, the banking regulator said that Custodia’s business plan could even pose a risk to the crypto community. Therefore, its decision to dismiss it is without prejudice.
Custodia answers
However, Custodia has fired back at the Fed. It is statement noted that the banking model seeks to prevent the kind of bank runs that recently occurred by establishing a fully solvent bank intended to serve rapidly changing industries.
It criticized the Fed and Kansas City Reserve Bank for not approving the application and what it termed “coordinated attacks and behind-the-scenes press leaks of confidential Custodia information.”
The bank concluded that the recent Fed release is a “result of a series of procedural abnormalities, factual inaccuracies that the market refused to correct, and general bias against digital assets.”
No room for crypto?
Meanwhile, the Fed statement is likely to add more fuel to the fire of conspiracy theories about the Biden administration trying to de-bank the crypto industry. The Fed release is the longest order in the bank’s history and gives an idea of the Fed’s views on stablecoins.
It mentioned that allowing Custodia-issued stablecoin AVIT to be deposited into a Fed main account could give the token some form of support. Makes it possible to scale quickly and get more users globally.
Disclaimer
BeInCrypto has reached out to the company or person involved in the story for an official statement on the latest development, but has yet to hear back.
