Custodia Bank denied membership in the US Federal Reserve

The US Federal Reserve has rejected Custodia Bank's (formerly known as Avanti Bank) application for membership in the system because its new business model poses unacceptable security risks.

An application by Custodia Bank to open a master account, which could enable the financial institution to conduct direct transactions with other credit institutions through the reserves of the Central Bank, was rejected by the US Federal Reserve Board (FRS).

“Custodia’s risk management systems are not sufficient to address the challenges posed by the bank’s proposed cryptocurrency activities, including the financial institution’s failure to effectively address money laundering and terrorist financing risks,” the Fed said.

Custodia Bank CEO Caitlin Long said that Custodia has “always actively pursued federal regulation, often going beyond all the requirements that apply to traditional banks.”. Therefore, she is “surprised and extremely disappointed by the Fed's decision.”

The decision comes almost 18 months after Custodia Bank applied for Federal Reserve membership.. Last year, Caitlin Long sued the Fed's Board of Governors and the Federal Reserve Bank of Kansas City for delays in processing the application.