The Federal Reserve (Fed) has come out all guns blazing against Custodia Bank’s attempt 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 claimed 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 become a member of the Federal Reserve System and obtain a Federal Master Account.
But the Fed rejected the membership application 18 months later in January 2023. Custodia filed a lawsuit against the Fed in June 2022 over its master account application, which is still pending.
Fed gives detailed reasons for rejection
At the time of the rejection, the Fed stated that it rejected the application due to significant risks surrounding the business model and inadequate risk management systems. Its new statement went further in explaining those reasons.
According to the Fed, the reason for its rejection can be classified under four headings. These are managerial factors, financial factors, corporate strength factors and convenience and need factors. It states that Custodia does not have adequate risk management systems and controls appropriate to the crypto industry it chooses to serve.
“Those concerns are further exacerbated with respect to Custodia as it is an uninsured depository institution seeking to focus exclusively on offering products and services related to the crypto-asset sector, which are increasingly Illicit finance presents security and soundness risks.”
Although the Fed acknowledged that the bank “appears to have sufficient capital and resources to sustain initial operations,” it questioned its stability, saying that its business model is vulnerable to volatility.
Notably, the banking regulator said that Custodia’s business plan could also pose a risk to the crypto community. Hence, the decision to reject it without prejudice.
However, Custodia has hit back at the Fed. Its statement Noted that the bank model seeks to prevent the recent bank run by establishing a fully solvent bank to serve rapidly changing industries.
It criticized the Fed and the Kansas City Reserve Bank for not approving his application and termed it as a “coordinated attack and behind-the-scenes press leak of confidential custodian information”.
The bank concluded that the recent Fed release was the result of “numerous procedural anomalies, factual inaccuracies that Watan refused to correct, and a general bias against digital assets.”
No room for crypto?
Meanwhile, the Fed’s statement will likely 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 outlook on the stablecoin.
It noted that allowing the deposit of AVIT, the stablecoin issued by Custodia, into the Fed master account could provide some form of support to the token. Enabling it to scale quickly and get more users globally.
BeInCrypto has reached out to the company or individual involved in the story for an official statement regarding the recent developments, but has not yet received a response.