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Rough day for crypto banks: Custodia gets rejected by the Fed while Silvergate suspends dividend payments

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(Kitco News) - The U.S. Federal Reserve Board has rejected Custodia Bank’s application to become a member of the Federal Reserve System, saying that the “firm's application as submitted is inconsistent with the required factors under the law.”

Custodia is a digital assets bank located in the state of Wyoming that originally filed its application for membership in the Federal Reserve System in August 2021.

“The firm's novel business model and proposed focus on crypto-assets presented significant safety and soundness risks,” the press release from the Fed said. “The Board has previously made clear that such crypto activities are highly likely to be inconsistent with safe and sound banking practices.”

The central bank also stated that the risk management framework employed by Custodia 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.”

Due to these and other concerns, the application submitted by the digital asset bank was deemed to be “inconsistent with the factors the Board is required to evaluate by law.”

In response to the decision by the Fed, a press statement from Caitlin Long, the CEO of Custodia, said that the bank is “surprised and disappointed by the Board’s decision today. The Fed advised Custodia 72 hours ago that it could either withdraw its membership application or see it denied, and the Fed denied it in record time.”

Long went on to note that “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. Custodia actively sought federal regulation, going above and beyond all requirements that apply to traditional banks.”

The denial of membership doesn’t appear to have come as a complete shock to Custodia or Long as the bank’s CEO finished up her statement by saying, “The Board’s denial is unfortunate but consistent with the concerns that Custodia has raised about the Federal Reserve’s handling of its applications, an issue we will continue to litigate.”

In June of last year, the bank filed suit against the Federal Reserve, alleging “favoritism” and a “lack of respect” by the Board of Directors of the Kansas City Fed after it granted BNY Mellon approval for a Fed master account while denying the same to Custodia for nearly two years.

The digital asset bank’s application for a master account with the Federal Reserve – which was initially filed in October 2020 – is still pending. The statutory deadline for making a decision is 12 months. If granted, Custodia will be provided with direct access to the Federal Reserve’s payment systems without the need for a third-party bank, enabling it to deposit funds with the Fed and have the ability to settle transactions with other lenders via central bank reserves.

Senate ACCEPT resolution would require Capitol vendors to accept crypto payments

Silvergate suspends dividend payments

In other crypto banking news, Silvergate Capital (SI) announced the suspension of dividend payments on its preferred stock in an effort to preserve capital as it struggles to stay afloat.

Earlier this month, the crypto-focused bank revealed that it suffered a net loss of more than $1 billion in the fourth quarter of 2023 due to a “transformational shift” in the digital asset industry, resulting in a full-year loss of $949 million. At that time, the firm announced that it would be laying off 40% of its staff as a cost-cutting measure.

This latest capital-preserving move affects its 5.375% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, according to the press release from Silvergate.

“This decision reflects the Company’s focus on maintaining a highly liquid balance sheet with a strong capital position as it navigates recent volatility in the digital asset industry. The Company continues to maintain a cash position in excess of its digital asset customer related deposits,” the bank wrote. “The Company’s Board of Directors will re-evaluate the payment of quarterly dividends as market conditions evolve.”

At the time of writing, SI stock is down 5.56% on the day and trading at $13.32, which represents a 94.5% decline from its all-time high of $239.10 that was hit on November 16, 2021.

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