The Federal Reserve Board of Directors has once again declined Custodia Bank’s membership application, citing concerns about the bank’s business model and its ability to meet the goals set out in the Federal Reserve Act.
The Federal Reserve System officials noted that Custodia Bank’s application was “inconsistent” in terms of financial, managerial, and corporate powers.
Specifically, the Board expressed dissatisfaction with Custodia’s approach to risk management and its narrow focus on the cryptocurrency sector of the economy.
The Fed argued that Custodia’s reliance on cryptocurrencies makes the bank “insufficiently diversified.” The Board concluded that Custodia’s business model does not align with the Federal Reserve Act’s objectives.
According to the Federal Reserve, accredited financial institutions in Wyoming are banks that accept deposits and engage in other banking-related activities, with full reserves and state insurance coverage.
However, Custodia Bank cannot provide insurance coverage for deposits or activities related to cryptocurrency transactions, which increases the risk of capital flight and a potential crisis in the digital asset market.
Earlier, the Vice Chairman of the Fed, Michael Barr, proposed the creation of a regulatory group to oversee crypto assets. Barr acknowledged the transformative potential of cryptocurrencies but emphasized the importance of having rules to govern the industry.