Fed Board again rejects Custodia Bank's membership application
Federal Reserve (Fed) functionaries said that in reviewing Custodia Bank's next application for membership in the system and protesting the Federal Reserve Board's decision, it was found that Custodia's application was "inconsistent" in terms of financial, governance and corporate authority.
In particular, the Fed board was not satisfied with Custodia's approach to risk management and reinforced the regulator's concerns about a business plan focused on a narrow sector of the economy. According to the Fed, Custodia's reliance on cryptocurrencies means that the bank "does not have a substantially diversified business." The board believes that Custodia's business model does not meet the goals of the Federal Reserve Act.
In its opinion, the Federal Reserve Board explains that Wyoming's Board-accredited financial institutions are banks that accept deposits and engage in other banking-related activities with full backup and state insurance coverage.
However, in the case of Custodia Bank, insurance coverage for deposits and activities related to servicing cryptocurrency transactions is not available. Thus, the absence of guaranteed insurance coverage for Custodia's operations could increase the risk of "massive capital flight" and "firm contagion" in the event of a crisis in the digital asset market.
Earlier, Federal Reserve Deputy Chairman Michael Barr proposed the creation of a specialized group to develop regulation of crypto-assets. Michael Barr acknowledged that cryptocurrencies can transform the financial system, but the benefits of innovation can only be realized if there are rules governing the industry.
