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The Federal Reserve Board has rejected a Wyoming cryptocurrency bank’s application for membership in the Federal Reserve System, officials announced on Friday, setting a blow to the crypto industry’s attempts to build acceptance in mainstream U.S. banking.
Many in the crypto industry have looked to Cheyenne-based Custodia Bank’s more than 2-year-old application to pioneer crypto banking. The approval would have meant access to the Federal Reserve’s services, including its electronic payment system.
The rejection fuels doubts about the viability of crypto banking, particularly in Wyoming, a state that has attempted to become a hub for crypto banking, exchanges, and mining.
Custodia’s business model and focus on crypto posed “significant security and soundness risks” for depositors, the Federal Reserve Board said in a statement.
Federal Reserve Board officials during a Fed Listens event in Washington, DC on Friday, September 23, 2022. (Al Drago/Bloomberg via Getty Images/Getty Images)
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“The board has previously clarified that such crypto activities are most likely inconsistent with safe and sound banking practices,” he added.
The board also expressed doubts about Custodia’s ability to prevent crypto money laundering and terrorist financing.
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Custodia sued the Federal Reserve Board and the Federal Reserve Bank of Kansas City in federal court in Wyoming last year, accusing them of unreasonably waiting to process their application. In a statement on Friday, the company said it was “surprised and disappointed” by the rejection and pledged to follow up on the matter.
“Custodia provided a safe, government-regulated, solvent alternative to the ruthless crypto speculators and scammers that invaded the US banking system, with disastrous results for some banks. Custodia actively sought federal regulation and went beyond any requirements that apply to traditional banks,” the statement quoted CEO Caitlin Long as saying.
FILE PHOTO: Representations of cryptocurrencies are seen in this illustration dated August 10, 2022. (REUTERS/Dado Ruvic/Illustration / Reuters photos)
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Wyoming has enacted many crypto and blockchain friendly laws and regulations in recent years, the electronic ledgers that run Bitcoin, Etherium and other cryptocurrencies. A new law allows state-licensed crypto banks, so-called special purpose depository institutions.
Wyoming has chartered four such crypto banks called SPDIs or “Speedies”, including Custodia. They have shown little public activity while Custodia’s application was pending.
