US Federal Reserve denies Custodia Bank's request for Fed supervision

The Federal Reserve Board has denied the request from crypto-focused Custodia Bank to reconsider its membership to the Federal Reserve System.

The United States Federal Reserve has denied a request from cryptocurrency bank Custodia Bank to reconsider its membership application to the Federal Reserve System, while a district court has allowed a lawsuit between the two parties to continue to play out.

The central bank announced its membership denial on Feb. 23, noting the Federal Reserve Board previously decided that Custodia’s application “was inconsistent with the required factors under the law.”

@federalreserve announces it has denied the request by Custodia Bank, Inc., for reconsideration of the Board’s decision last month on its application to be supervised by the Federal Reserve: https://t.co/ZYNUEoLeN1

— Federal Reserve (@federalreserve) February 23, 2023

The Fed rejected Custodia’s application to become a member in January, around four years after it applied for it in 2019. Board rules allow applicants to request a reconsideration of membership decisions.

At the time of the rejection, the Fed claimed Custodia had an “insufficient” management framework.

It also cited a joint declaration it made alongside the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency that claimed cryptocurrencies were “inconsistent with safe and sound banking practices.”

Custodia has said it wishes to join the Federal Reserve System so it can be regulated under the standards that apply to traditional banks and open a path for other crypto-banks that wish to be held to those same heightened standards.

Cointelegraph contacted Custodia, which declined to comment on the matter.

Lawsuit to play out

Earlier this week, on Feb. 22, a Wyoming District Court judge denied a motion from the Fed board to dismiss a lawsuit from Custodia over a more-than-two-year delay for a Federal Reserve master account.

A master account would allow Custodia to access the Federal Reserve payment systems without using a third-party bank. The Fed denied Custodia’s master account application on Jan. 27, more than two years after it applied for the master account in October 2020. 

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The Fed then moved to dismiss the case due to the account denial making the lawsuit moot. However, Custodia filed a proposed amended complaint on Feb. 17, alleging the Fed unfairly singled out and rejected its application as part of a "concentrated and coordinated" effort with President Joe Biden's administration and asked the court to overturn the decision.

In a Feb. 17 statement, Custodia spokesperson Nathan Miller said the complaint “zeroes in on the core legal issue: whether Congress even granted the Fed discretion to decide master accounts at all.” He added the Fed “forced the hand” of the crypto-bank, “which tried every avenue to find a reasonable path forward.”

The judge has ordered Custodia to file its first amended complaint to the court by March 1.