The US Federal Reserve declines Custodia Bank's request for Fed oversight

By: Henry Felix

February 24, 2023 2:55 AM

The Federal Reserve Board has refused crypto-focused Custodia Bank's request to reconsider its membership in the Federal Reserve System.

The US Federal Reserve has dismissed cryptocurrency bank Custodia Bank's request to review its membership application to the Federal Reserve System, while a district judge has permitted a litigation between the two sides to proceed.

The Federal Reserve Board previously ruled that Custodia's application "was inconsistent with the required factors under the law," according to the central bank's announcement on Feb. 23.

Custodia's bid to join the Fed was denied in January, nearly four years after it was submitted in 2019. Board regulations allow applicants to request that membership decisions be reconsidered.

The Fed claimed Custodia had a "insufficient" management framework at the time of the rejection.

It also highlighted a joint statement it issued with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) in which it stated cryptocurrencies were "inconsistent with safe and sound banking operations."

Custodia has stated that it aspires to join the Federal Reserve System in order to be regulated under the same criteria that apply to regular banks, paving the way for other crypto-banks to follow suit.

The Legal Process

On Feb. 22, a Wyoming District Court Judge refused the Fed Board's petition to dismiss Custodia's complaint over a more-than-two-year delay for a Federal Reserve master account.

Custodia could use a master account to gain access to the Federal Reserve payment systems without utilizing a third-party bank. Custodia's master account application was denied by the Fed on January 27, more than two years after it was submitted in October 2020.

The Fed subsequently attempted to dismiss the case, claiming that the account denial rendered the complaint moot. Custodia, on the other hand, filed a proposed revised lawsuit on Feb. 17, arguing that the Fed improperly singled out and rejected its application as part of a "concentrated and coordinated" effort with President Joe Biden's administration, and requesting that the decision be reversed.

It observed at the time that the membership and master account denials occurred on the same day the White House issued a statement emphasizing the "imperative of separating hazardous digital assets from the banking system," and that the timing was "no coincidence."

Custodia has been directed by the judge to file its first revised complaint with the court by March 1.