Crypto General

Custodia Bank rejection: What’s next?

On Friday, Jan. 27, 2023, the Federal Reserve Bank (FRB) of Kansas City announced its decision to reject Custodia Bank’s application for a master account.

If approved, the bank would have access to the payment rails between banks without relying on an intermediary.

caitlin long
Caitlin Long, CEO of Custodia Bank

“We believe that the Fed’s decisions are misguided and wrong. Despite these setbacks, Custodia remains committed to realizing our vision of a better kind of bank,” said Caitlin Long, CEO of Custodia Bank. 

The bank’s application was first submitted 18 months before 2022’s revelations regarding centralized entities within DeFi.

A hostile environment

With regulators still licking their wounds from FTX’s downfall, the TradFi system is on the offense. Many are unsurprised by the decision, although disappointed. 

“Overall, the move to reject Custodia’s application by the FRB isn’t surprising,” said Zach Bronstein, COO of Endaoment. “Regulators do not know what to do with crypto, and legislators have not passed adequate laws to give regulators a clear path forward, making everyone uneasy.”

Custodia has made compliance a priority, and many believe Long to be a staunch advocate for digital asset banks looking for regulatory recognition. 

In response to the above tweet, Long highlighted that digital assets were not kept on the balance sheet, using a third party instead.

“We’re the ones coming through the front door, asking for permission rather than forgiveness,” Long told Axios. “That’s what regulators say they want, but their actions prove otherwise.”

But TradFi has been burnt before. Who they perceived to be a perfect representative of CeFi’s ability to be taken into the fold is in the process of “proving his innocence” for fraud. 

Despite Long’s attempts at keeping up with regulators’ requirements, the announcement is, for some, a clear signal of their confusion about crypto.  

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So what’s next? 

Long stated that this rejection is only the beginning. 

“We will proceed to launch as a state-chartered bank as we exercise our right to appeal the Fed’s decision and oppose its attempt to dismiss our lawsuit,” she said. “Recent turmoil within the digital asset sector, caused by fraudulent actors and lax oversight, has rightly spooked financial regulators.” 

The lack of regulatory clarity is, however, an ongoing concern. Long’s attempts at toeing the line have ultimately proved fruitless in the current environment. 

“Without specific instructions provided, it falls on the FRB to explain to organizations like Custodia not just why they rejected their application, but what is needed to pass the FRB litmus test,” said Bronstein. “Based on their press release, they have failed to provide that clarity.”

“It is important that crypto organizations continue to go through the proper channels to get accreditation for their legitimate business practices. I applaud Custodia for their actions, as it is only through continued attempts to join this system that crypto will continue to mature and be accepted into existing structures.”

Long continues to be confident that the bank will prevail.

“What’s lost amid the noise is that Custodia Bank’s non-leveraged, 100% liquid business model offers a solution to these risks. We are confident this reality will become clear to bank regulators in time.”

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