Fed Rejects Crypto Bank’s Master Account Application for US Payment System
On Friday, the Federal Reserve Board denied Custodia, a Wyoming-based crypto-centric bank, membership in the central bank’s elite payment system, citing significant safety and soundness risks in the firm’s proposed business plan and focus on crypto assets.
As it does not have federal deposit insurance, the bank, which defines itself as a “special purpose depository institution,” had intended to engage in activities such as issuing crypto assets on decentralized networks.
The company Custodia, formerly known as Avanti, has taken legal action against the Kansas City Federal Reserve Bank for delaying their decision to grant them special access to the Fed, known as a master account.
The company holds a special state license from Wyoming for banks that deal with cryptocurrencies. In a statement, Caitlin Long, CEO of Custodia, expressed disappointment and surprise at the board’s decision and stated that the company would continue to fight the issue in court.
The Federal Reserve recently acknowledged that cryptocurrency activities are in opposition to established and safe banking practices, citing the significant volatility observed in the crypto industry over the past year.
Jaret Seiberg, Managing Director at Washington-based research group Cowen, stated in an email to MarketWatch, “We believe that the Fed’s decision is not surprising.
We believe that the Fed’s goal is to prevent states from creating entities that support cryptocurrency and have access to the payment system and Fed liquidity programs.
This is why it blocked Custodia from becoming a state-member bank and issued a broader policy statement. We do not anticipate that the Fed will grant Custodia a Master Account.”
The Federal Reserve’s decision to grant Master Accounts to crypto firms with state charters met with mixed reactions. The move allows these firms to access payment systems and Fed-related payment services, enabling more seamless transitions between crypto and official currency.
However, Dennis Kelleher, President, and CEO of Better Markets, a group that advocates against financial deregulation, warns that the move poses a risk to the banking system.
He states that once these firms interconnect with the Fed, the bank has an interest in preventing the failure of these firms due to the collateral consequences.
Furthermore, he believes that the crypto industry’s desire to gain access to and become interconnected with the core of the banking system is driven by profit and poses a risk to taxpayers.
