U.S. Federal Reserve rejects crypto-focused bank's application to be supervised by the Fed

FILE PHOTO: The U.S. Federal Reserve building is pictured in Washington, March 18, 2008. REUTERS/Jason Reed/File Photo

(Reuters) -The U.S. Federal Reserve on Friday rejected crypto-focused Custodia Bank's application to become a member of the Federal Reserve System, saying the bank's proposed business model and focus on digital assets presented significant safety and soundness risks.

Custodia, which is based in Wyoming and is chartered through the state as a special purpose depository institution, lacked a sufficient risk management framework to address the heightened risks associated with crypto, the Fed said, including crypto's potential use in money laundering and terrorist financing activities.

Custodia Bank Chief Executive Caitlin Long said in a statement that the bank was "surprised and disappointed" by the Fed's decision. “Custodia actively sought federal regulation, going above and beyond all requirements that apply to traditional banks," she said.

Separately, Custodia has sued the Federal Reserve Bank of Kansas City, arguing that it has unfairly delayed a decision on Custodia' application for a highly coveted master account, which gives companies access to Fed payment services.

The Fed also issued a policy statement in conjunction with the denial of Custodia Bank's application, clarifying that banks supervised by the U.S. central bank with or without deposit insurance are subject to the same limitations on activities, including those related to cryptocurrency.

"Today’s action would not prohibit a state member bank, or prospective applicant, from providing safekeeping services, in a custodial capacity, for crypto-assets if conducted in a safe and sound manner and in compliance with consumer, anti-money laundering and anti-terrorist financing laws," the Fed said in a news release.

(Reporting by Hannah Lang in Washington; editing by Jonathan Oatis)

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