On Friday, the Federal Reserve Board announced it had rejected an application by a custodian bank to become a member of the Federal Reserve. Custodia is a Wyoming chartered bank that is not FDIC insured. The goal of the special purpose bank is to be the bridge between the digital asset sector and the US dollar payment system.
In addition, the Federal Reserve has announced policies proposing to extend restrictions on crypto assets to uninsured state-licensed banks, providing a level playing field with national banks and FDIC-insured banks. issued a statement.
All seven members of the Federal Reserve Board voted against providing Custodia with access to the master account.
The Federal Reserve’s grounds for refusal include proposals for “novel and untested cryptographic activities, including issuing cryptoassets on open, public, and/or decentralized networks.” The Federal Reserve further said Custodia’s risk management framework was “insufficient” to address the rising risks of cryptocurrencies, especially his AML.
The upstart bank first applied to the Federal Reserve Board (FRB) for access to its master account more than two years ago and sued the Federal Reserve over the matter. Without a direct account, you would have to go through an intermediary, adding a layer of cost that blockchain tries to address.
Caitlin Long, CEO of Custodia, said, “Custodia is committed to providing a secure, federally regulated solution to the reckless speculators and cryptocurrency fraudsters who have infiltrated the U.S. banking system. “Custodia actively sought federal regulation beyond all the requirements that apply to traditional banks. It is disappointing, but consistent with the concerns Custodia has raised about the handling of the Federal Reserve’s filing, we plan to continue litigating this issue.”
As a special purpose bank, Custodia’s customer deposits remain 100% backed as the bank is not permitted to proceed with loans. There is also Avit, a bank-issued digital dollar.
Given the collapse of FTX, other cryptocurrency failures, and volatility, authorities are cracking down on the sector and trying to minimize links between cryptocurrencies and the banking sector.
But Custodia founder Kaitlyn Long has a very thoughtful approach to the space. Since launching her Custodia in 2020, she has been passionate about providing a regulated path to the digital asset sector. Before she got into the crypto world, she was at Morgan Stanley where she worked for 9 years and then at Credit Suisse where she worked for 10 years.
April Long said, “Bitcoin did not understand that settlement risks differ significantly between bitcoin and traditional assets, so at some point they overthrew G-SIBs (global systemically important banks). I am trying.”
Federal Reserve Crypto Proposal for Uninsured State Banks
The Federal Reserve’s announcement on Friday was a draft policy statement. It aims to prevent state-owned banks from holding most cryptocurrencies. When it comes to stablecoins, banks require a no objection letter from the Federal Reserve Board and have sufficient control.
From a legal perspective, the Federal Reserve can impose banking restrictions on nationally licensed banks. FDIC-insured banks have similar limits as national banks, so national bank limits also apply. The Federal Reserve Board has said under Federal Reserve Act it can impose discretionary limits on state-licensed banks, which are used for crypto limits.
So far, two Federal Reserve banks have significant crypto exposure by acting as significant on-ramp and off-ramp for the digital asset sector. Tiny Silvergate has managed to weather a significant drop in digital asset customer deposits, even though quarter after quarter he posted a loss of $1 billion. It also offered a range of services, including a limited amount of encrypted loans. Its share price is just over a tenth of what it was in May 2022, before the cryptocurrency crash.
The larger signatories, already fairly diversified, recently announced they would reduce their exposure to the digital assets sector.