Federal Reserv denies crypto banks’ request to join the American payment system.

The Federal Reserve Board turned down a Wyoming-based bank that focuses on cryptocurrencies request to join its exclusive payment system on Friday. The Fed claimed in a news release that the company’s proposed business plan and emphasis on crypto assets constituted serious safety and soundness risks. Custodia Bank does not offer federal deposit insurance. As a “special purpose depository institution,” the business describes itself.

According to a press release from the central bank, it informed the Fed that it intended to engage in operations that would entail issuing crypto assets on decentralized networks.

What we do and do not know about future regulation in the United States is listed below.

Custodia, formerly Avanti, makes advantage of a unique state license from Wyoming for banks that conduct cryptocurrency business. Avanti filed a lawsuit against the Kansas City Federal Reserve Bank in 2022 after it took too long to decide whether to give it master account-level access to the Fed.

The Board’s decision today “surprises and disappoints Custodia,” according to a statement from Custodia CEO Caitlin Long. “The Board’s decision is regrettable but consistent with Custodia’s concerns with the Federal Reserve’s treatment of its applications, a subject we will continue to battle,” said Custodia.

The enormous volatility in the cryptocurrency market over the past year, as noted by the Fed recently, is evidence that crypto activities are at odds with safe and sound banking procedures.

“We don’t think the decision is shocking. Jaret Seiberg, managing director at Washington-based research firm Cowen, wrote in an email to MarketWatch, “To us, the Fed wants to stop states from chartering businesses to support crypto that can access the payment system and Fed liquidity initiatives.”

“We think this explains both the decision to make the broader policy statement and the decision to prevent Custodia from becoming a state-member bank. We don’t anticipate the Fed giving Custodia a Master Account, the speaker continued.

Businesses can utilize payment systems and other Fed-related payment services by using a master account.

According to Congressional Research Service, a public policy research organization that operates within the Library of Congress, some cryptocurrency companies with state licenses have registered for master accounts to enable more fluid transitions between crypto and legal tender. In an interview with MarketWatch, Dennis Kelleher, President and CEO of Better Markets, a group opposed to financial deregulation, said: “Once you obtain a master account then you have access to Fed facilities and two things happen.” “One is that it’s a legitimizing activity, and if you receive the Fed’s external validation for your financial activities, many more individuals will do business with you. because of which they may sell those activities to a larger audience and boost their earnings.

The central bank has an interest in preventing failure once a firm’s operations reach a critical mass because of the collateral repercussions of that failure, added Kelleher. The second thing is that once you are connected to the Fed, banking agencies find themselves in a precarious situation.

On Friday, the Fed also released a policy statement with the aim of supporting an even playing field for all banks with a federal supervisor, regardless of the status of deposit insurance. This was a separate but related action.

Bank accounts are typically insured by the Federal Deposit Insurance Corporation in the event that a bank collapses. According to the Fed’s announcement from last Friday, the Board’s supervision of both insured and uninsured banks will be subject to the same activity restrictions.

According to the statement, banks must show in their applications that the operations they conduct are legal and that they have in place risk management procedures, internal controls, and other safeguards that are “appropriate and suitable for the nature, extent, and risks of its activities.”

According to Kelleher, who thinks the move is advantageous for taxpayers, “the crypto sector and its political supporters have been striving to have access to and integrated with the core of the banking system because it would be enormously lucrative for their revenues.” The crypto sector will be disappointed by Custodia’s failure, he continued.

“The issue is that once you are connected to the banking system, the risks in your company, such as those associated with novel and unproven activities, which the Fed correctly noted here, become integrated and related to the banking system. Prior to the 2008 financial crisis, we observed this with subprime mortgages.

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