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The U.S. Federal Reserve has rejected a Wyoming cryptocurrency bank’s application for Federal Reserve System membership, officials announced Friday, dealing a setback to the crypto industry’s efforts to build acceptance in mainstream U.S. banking.
Cheyenne-based Custodia Bank’s more than 2-year-old app has been viewed by many in the cryptocurrency space as the bellwether for crypto banking. Approval means access to the Fed’s services, including its electronic payment system.
The rejection has raised doubts about the viability of crypto banks, especially in Wyoming, which has sought to become a hub for crypto banks, exchanges and mining.
In a statement, the U.S. Federal Reserve said Custodia’s business model and focus on cryptocurrencies presented “significant safety and soundness risks” to savers.
Federal Reserve officials during a Fed Listen event, Friday, Sept. 23, 2022, in Washington, DC. (Al Drago/Bloomberg via Getty Images/Getty Images)
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“The board has previously made clear that there is a high risk that such cryptographic activity would be inconsistent with safe and sound banking practices,” it added.
The board also expressed doubts about Custodia’s ability to prevent money laundering and terrorist financing through cryptocurrencies.
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Custodia sued the Federal Reserve Board and the Kansas City Fed last year in Wyoming federal court, alleging they took an unreasonably long time on its application. In a statement Friday, the company said it was “surprised and disappointed” by the rejection and pledged to pursue litigation on the issue.
“Custodia provided a safe, federally regulated, solvent alternative to reckless speculators and crypto scammers who infiltrated the U.S. banking system, with disastrous consequences for some banks. Custodia aggressively pursued federal regulation, It goes beyond all requirements that apply to traditional banks,” chief executive Caitlin Long was quoted as saying in the statement.
FILE PHOTO: This illustration shows cryptocurrencies, Aug. 10, 2022. (Reuters/Dado Ruvic/Illustration/Reuters Photo)
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Wyoming has passed a number of cryptocurrency- and blockchain-friendly laws and regulations in recent years, the electronic ledgers on which bitcoin, ethereum, and other cryptocurrencies run. A new law allows state-chartered crypto banks to be called special purpose depository institutions.
Wyoming has chartered four cryptocurrency banks known as SPDI, or “speedies,” including Custodia. While Custodia’s application was pending, they had little public activity.
