Federal Reserve Board rejects application by Custodia Bank

The Federal Reserve Board has denied the application by Custodia Bank, Inc., Cheyenne, Wyoming, to become a member of the Federal Reserve System. The Board has concluded that the firm’s application as submitted is inconsistent with the required factors under the law.

Custodia is a special purpose depository institution, chartered by the state of Wyoming, which does not have federal deposit insurance. The firm proposed to engage in novel and untested crypto activities that include issuing a crypto asset on open, public and/or decentralized networks.

The firm’s novel business model and proposed focus on crypto-assets presented significant safety and soundness risks. The Board has previously made clear that such crypto activities are highly likely to be inconsistent with safe and sound banking practices. The Board also found that Custodia’s risk management framework was insufficient to address concerns regarding the heightened risks associated with its proposed crypto activities, including its ability to mitigate money laundering and terrorism financing risks.

In light of these and other concerns, the firm’s application as submitted was inconsistent with the factors the Board is required to evaluate by law. The Board’s order will be released following a review of confidential information.