Crypto-friendly Custodia Bank Faces Setback As Fed Denies Application For Supervision

According to an official announcement, the crypto-friendly Custodia bank, founded by Caitlin Long, a well-known figure in the crypto industry, has been denied its application to come under the supervision of the United States Federal Reserve (Fed).

The Board had previously announced that the application had been denied. Nonetheless, the announcement confirmed that the order outlining the decision would not be available immediately due to the need to review it for confidential information.

The Federal Reserve Board order expresses “concerns” about Custodia Bank’s proposed business plans, which are entirely focused on the crypto sector. The Board believes that banks with business plans focused on a specific sector of the economy may be more “vulnerable” to economic or regulatory challenges.

Furthermore, the Fed’s recent denial notes that the Board’s concerns about Custodia Bank have been raised. The financial institution believes the crypto-friendly bank is a “uninsured depository institution,” not insured by the Federal Deposit Insurance Corporation (FDIC), and may pose greater risks to depositors and the financial system as a whole.

Furthermore, the Custodia Bank proposed the issuance of Avits, which are dollar-denominated tokens designed to function as a programmable “electronic negotiable instrument” and as deposits for purposes of federal banking law, according to the released Fed’s denial of the crypto-friendly bank.

The Fed notes in a press release that while Custodia Bank does not refer to Avits as “stablecoins,” they are likely to function similarly to stablecoins such as Tether USDT and USDC. Given the concerns about stablecoins and their potential use for “illicit purposes,” the Fed may have viewed Custodia Bank’s proposed issuance of Avits as a potential risk.

Custodia Bank responded after the Fed reiterated its conclusion. Caitlin Long, the financial institution’s founder, made several claims about the need for fully solvent banks, the Federal Reserve’s handling of bank-run risks, and the crypto industry.

Custodia Bank proposed a model that would hold $1.08 in cash for every dollar deposited by customers, which could be interpreted as a more conservative and risk-averse approach to banking.

Custodia Bank’s statement also emphasizes the critical need for fully solvent banks that are equipped to serve “fast-changing” industries in an era of rapidly improving technology, referring to the need for banks that can adapt to customer demand and changes in industries such as fintech and crypto-asset.

Custodia Bank’s statement also implies that the bank has not been intimidated by what it perceives as coordinated “attacks” and press leaks of confidential information by the Fed.

The notice also claims that the recent order denying Custodia Bank’s application for Federal Reserve System membership was the result of numerous procedural “abnormalities, factual inaccuracies, and a general bias against the crypto industry.”

Furthermore, the Custodia Bank’s claims suggest that the bank may need to go to court to vindicate its rights and compel the Fed to “comply with the law” in response to the denial of its application for membership in the Federal Reserve System.