Crypto bank Custodia's application to access Fed's payment system denied | Seeking Alpha

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The Federal Reserve has denied cryptocurrency firm Custodia Bank's application to access its payment system as ties between the digital asset space and traditional lending face tougher scrutiny in the face of the fallout from FTX ( FTT-USD ), according to a release dated Friday.

Cheyenne, Wyoming-based Custodia, formerly known as Avanti Financial Group, is a chartered lender that offers digital asset-focused financial services to various business. The firm was said to have sued the Federal Reserve Board and the Kansas City Fed over a long-standing processing of its application for a master account at the U.S. central bank that's still pending.

“Custodia’s risk management framework was insufficient to address concerns regarding the heightened risks associated with its proposed crypto activities, including its ability to mitigate money laundering and terrorism financing risks,” the Fed said in the release.

The increased resistance to Custodia, founded in 2020 by long-time bitcoin (BTC-USD) advocate Caitlin Long, comes amid increased regulatory scrutiny of the relationship between crypto and traditional banking, triggered by the November 2022 collapse of crypto exchange FTX (FTT-USD).

“Custodia offered a safe, federally regulated, solvent alternative to the reckless speculators and grifters of crypto that penetrated the U.S. banking system with disastrous results for some banks,” Long said in a statement in response to the Fed's decision. “Custodia actively sought federal regulation, going above and beyond all requirements that apply to traditional banks.”

In October 2022, Michael Barr, the Federal Reserve's vice chair of supervision, deemed that crypto firms' deposits pose "heightened liquidity risks" for banks.