Crypto banking is affected as the Federal Reserve’s Custodia Bank request is denied

The Federal Reserve Board has rejected a Wyoming cryptocurrency bank’s application for membership in the Federal Reserve System, officials announced Friday, setting back the crypto industry’s attempts to build acceptance in mainstream U.S. banking.

Cheyenne-based Custodia Bank has been hailed by many in crypto banking for more than two years as a leader in crypto banking. Approval would mean access to Federal Reserve services, including its electronic payment system.

The rejection raises doubts about the viability of crypto banking, especially in Wyoming, a state that has sought to become a hub for crypto banking, exchanges and mining.

Custodia’s business model and focus on cryptocurrencies posed “significant safety and stability risks” to depositors, the Federal Reserve Board said in a statement.

“The board has previously made it clear that such crypto activities are very likely inconsistent with safe and sound banking practices,” it added.

The committee also expressed doubts about Custodia’s ability to discourage money laundering and terrorist financing through cryptocurrency.

Custodia sued the Federal Reserve Board and the Federal Reserve Bank of Kansas City in Wyoming federal court last year, accusing them of unreasonably delaying her request. In a statement Friday, the company said it was “surprised and disappointed” by the rejection and vowed to continue litigating the matter.

“Custodia has offered a safe, federally regulated, solvent alternative to the reckless cryptocurrency speculators and fraudsters who have infiltrated the US banking system, with disastrous results for some banks. Custodia has actively sought federal regulation, going above and beyond any requirements that apply to traditional banks,” said CEO Caitlin Long.

Wyoming has passed many crypto and blockchain-friendly laws and regulations in recent years, the electronic ledgers on which Bitcoin, Etherium and other cryptocurrencies are kept. One new law allows for government-authorized crypto banks called special purpose depository institutions.

Wyoming has hired four such crypto banks, called SPDIs or “speedies,” including Custodia. They showed little public activity while Custodia’s application was pending.

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