Over the past century, the number of American banks has significantly decreased, dropping from 30,000 banks in 1921 to 4,997 U.S. banks in 2021, according to data from the Federal Reserve. Recently, the U.S. central bank denied Custodia Bank of Wyoming, a financial institution that holds $1.08 for every dollar deposited by customers. Although there appears to be a need for such a bank after the collapse of three major U.S. banks, the Federal Reserve stated that board members have “heightened concerns” about institutions with plans to focus solely on a narrow sector.
The Fed’s Explanation on Why it Denied Custodia Bank Highlights Adversity to Crypto-Asset Sector
Shortly before the collapse of Silvergate Bank, Silicon Valley Bank, and Signature Bank, the Cheyenne, Wyoming-based financial institution, Custodia Bank, was denied membership in the Federal Reserve System. The Federal Reserve Board specified that the application submitted by Custodia was “inconsistent with the factors required by law.” This week, the Fed published its explanation as to why it rejected the Wyoming bank. Custodia would be distinct from the numerous banks currently in operation, as it holds a complete reserve and more to cover deposits.
A statement from Custodia published on March 24 highlighted the need for a bank that operates in this manner, following the collapse of several banks. “Historic bank runs in the last two weeks underscore the dire need for fully solvent banks that are equipped to serve fast-changing industries in an era of rapidly improving technology,” the company stated. “That is the exact model proposed by Custodia Bank – to hold $1.08 in cash to back every dollar deposited by customers. Regrettably, the Federal Reserve did not pay enough attention and allowed bank run risks to accumulate at conventional banks.”
The Fed stated in its decision that it had “fundamental concerns” about Custodia’s application, including its “novel and unprecedented features.” One problem the Fed has with Custodia’s business model is its concentration on narrow banking and the provision of services to crypto clients. “In general, the board has heightened concerns about banks with business plans focused on a narrow sector of the economy,” the U.S. central bank’s board stated. “Those concerns are further heightened concerning Custodia because it is an uninsured depository institution intending to concentrate nearly solely on offering…
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