The US Federal Reserve has turned down an application by Custodia Bank to become a member of the Federal Reserve System. The Fed has noted that Custodia Bank’s focus on digital assets is the key reason behind turning down this application.
Custodia Bank fails bid to join the Federal Reserve System
Custodia Bank is situated in Wyoming and operates as a special purpose depository institution. According to the Federal Reserve, the bank presented a significant safety and soundness risk. It also lacked adequate risk management strategies to address the increased risk associated with cryptocurrencies.
The Fed noted that crypto assets risk being used to promote money laundering and terrorism financing activities. A policy statement issued by the Fed noted that banks regulated by the institution, regardless of whether they have deposit insurance, are subject to certain limitations, including activities related to cryptocurrencies.
The US central bank further noted that the action did not prohibit state member banks from offering custodial services for crypto assets. However, these institutions needed to demonstrate that these activities were being done safely and soundly and that they complied with the set anti-money laundering and anti-terrorism financing laws.
The Chief Executive of Custodia Bank, Caitlin Long, commented on this development saying that the Fed’s decision was surprising and disappointing. Long noted that Custodia Bank had been seeking federal regulations and even surpassed the requirements that applied to traditional banks.
Custodia Bank is currently at loggerheads with the Federal Reserve Bank of Kansas City. The bank has filed a lawsuit against the institution over a delayed decision on Custodia’s application for a master account. This type of account enables companies to access the Federal Reserve payment services.
Biden Administration issues guidelines to mitigate crypto-related risks
The Biden Administration recently published a blog post containing a roadmap on how to mitigate the risks associated with cryptocurrencies. In the roadmap, the White House has mentioned some of the catastrophic events that happened in the crypto industry last year, such as the implosion of Terra and the bankruptcy of FTX.
In the roadmap, the administration has focused on ensuring that crypto assets do not pose a risk to financial stability. The roadmap mentions that experts within the White House have developed a framework that will ensure digital assets exist safely and responsibly.
The statement has also urged the US Congress to step up its efforts in regulating the cryptocurrency market. The administration also wants Congress to strengthen the transparency and disclosure requirements for crypto firms. It also wants legislatures to impose heavy penalties for any violations of illicit finance laws.
The White House has also warned that it would be a “grave mistake” to deepen the ties between cryptocurrencies and traditional finance. It further mentioned that it would be releasing safeguards for technologies p[powering cryptocurrencies to protect consumers in the coming months.
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