• The Federal Reserve Board has rejected Custodia Bank’s application to become a member of the Federal Reserve System.
• Custodia’s application for a master account to enable international transfers and other important banking functions remains pending.
• Custodia, headed by Caitlin Long, applied for the master account in 2020 and sued the Fed over the long delay in considering the application in June.

The United State Federal Reserve Board recently announced its decision to reject Custodia Bank’s application to become a member of the Federal Reserve System. The Fed stated that the application was “inconsistent with the required factors under the law,” citing an earlier joint declaration with the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency that found crypto assets to be at odds with sound banking practices. The bank also had an “insufficient” management framework according to the Fed.

In spite of the rejection, the bank’s application for a master account remains pending. A master account enables a bank to make international transfers and carry out other important functions. Custodia, headed by Caitlin Long, applied for the master account in 2020 and sued the Fed over the long delay in considering the application in June. The Fed gave the bank 72 hours to withdraw its application, to which Custodia released a statement saying that it “actively sought federal regulation, going above and beyond all requirements that apply to traditional banks.”

The Federal Reserve only issued guidelines for granting master accounts in August 2020. According to these guidelines, applicants need to demonstrate that they have the operational capacity, financial stability, and effective risk management, among other things. Despite Custodia’s efforts to comply with these guidelines, the Fed ultimately rejected the application.

Custodia has not yet commented on the Federal Reserve’s decision, though it is likely to appeal the decision or seek alternate forms of regulation. It remains unclear how this decision will affect Custodia’s business model and what the implications may be for other banks seeking similar applications.