Custodia: A Bank That Does Not Lend

image_pdfSave to pdf fileimage_printPrint

I discovered Caitlin Long on Twitter (@CaitlinkLong_) about a week ago. She worked on Wall Street for 22 years with stops at Morgan Stanley, Credit Suisse, Salomon Brothers.  She then came to her senses and returned to Wyoming.

Caitlin Long Banks That Do Not Lend

Caitlin Long

She has been a

Blockchain evangelist since 2014 and bitcoin since 2012; served on Morgan Stanley’s internal blockchain working group.

And she founded Custodia Bank, the subject of this article.  From the bank’s website:

The U.S. urgently needs to put in place safe business models for the banks that bank the fast-moving industries, like that proposed by Custodia, so that the Federal Reserve does not need to backstop such banks. Custodia proposed to hold $1.08 in cash for every dollar deposited by its customers. [Emphasis added]

About Custodia Bank

Custodia is a 100% reserve bank.  They do not engage in fractional reserve banking.  Therefore, they do not need (or have) deposit insurance.  If they live up to their stated goal, their reserves would be 108% of deposits.  And they make no loans.  Instead, they seem to be financing the banking services by acting as a custodian for crypto-securities.

Custodia Bank home page Banks That Do Not Lend

Custodia Bank home page

Custodia has applied for Federal Reserve membership and to be a Master Bank.  Fed membership would give them access to the Fed’s Discount Window loans.  Would they be required to deposit reserves at the Fed? I don’t know.  Logic says Fed supervisors will take note if their reserves fall below 100% of deposits.  But logic is usually not a good guide to regulatory behavior.

The Fed Responds

The Fed denied the membership application. A few excerpts:

In general, the Board has heightened concerns about banks with business plans focused on a narrow sector of the economy. Those concerns are further elevated with respect to Custodia because it is an uninsured depository institution seeking to focus almost exclusively on offering products and services related to the crypto-asset sector, which presents heightened illicit finance and safety and soundness risks.

Pre-membership examination findings are particularly insightful in relation to a de novo charter because there is a lack of a management track record to review. The findings of Federal Reserve staff’s pre-membership examination suggested significant deficiencies in Custodia’s ability to manage the risks of its day-one activities, which consist of limited basic banking services. Specifically, the findings indicated Custodia’s risk management and controls for its core banking activities were insufficient, particularly with respect to overall risk management; compliance with the Bank Secrecy Act (“BSA”) and U.S. sanctions; information technology (“IT”); internal audit; financial projections; and liquidity risk management practices.[Footnote links deleted,]

Custodia Replies

Custodia has a long, detailed response here. Again, some excerpts. (Hyperlinks removed.)

The Fed outlined at least five new policies in the Custodia order. Banking and digital asset policy experts have begun to discuss them all, both in blog posts and at a Wharton RegTech conference on Friday (which was subject to Chatham House Rules and in which Custodia participated). More discussions are forthcoming, but here are the new policies identified so far:

  1. The Fed outlined at least five new policies in the Custodia order. Banking and digital asset policy experts have begun to discuss them all, both in blog posts and at a Wharton RegTech conference on Friday (which was subject to Chatham House Rules and in which Custodia participated). More discussions are forthcoming, but here are the new policies identified so far:The order may cast doubt on whether, in the Fed’s view, any issuer of a stablecoin on an “open, public and/or decentralized network,” such as Bitcoin or Ethereum, can comply with anti-money laundering/combating financing of terror laws due to the existence of unhosted wallets (see, e.g., pp. 29-34).
  2. The order may cast doubt on whether any “financial institution” is permitted to pay blockchain transaction processing fees to unknown validators, including mining or gas fees (see, e.g., pp. 33-34).
  3. The order may cast doubt on whether the Glass-Steagall Act prohibits a bank from both taking deposits and issuing a stablecoin (see, e.g., p. 68). On this topic the Fed appears to have made a significant break from the President’s Working Group, which recommended that no entity other than an insured depository institution can issue stablecoins. … Some have speculated that the Fed’s newly-articulated policy in the Custodia order could also relate to the Fed’s own project to explore issuing a central bank digital currency (CBDC), since the 12 regional federal reserve banks are privately owned and are likely subject to patents – and Custodia holds the U.S. patent on the tokenization of bank deposits (U.S. patent number 11392906, granted in July 2022).  …
  4. The Fed’s decision not to admit uninsured state-chartered banks as Fed member banks opens a new chapter in the history of the dual banking system in the U.S., in which both States and the OCC have equal power to charter banks and States can choose to defer to federal bank regulators but are not required to do so. The Fed’s new policy means it believes that States must defer to federal bank regulators – something with which States may take issue. Multiple states already have uninsured bank charter laws (including Connecticut, Wyoming and Nebraska, with others under consideration). …
  5. In the Custodia order the Fed de facto established a new requirement that state banks be FDIC-insured in order to become Fed member banks because, in its words, FDIC insurance is “a critical tool in preventing bank runs.” (That is interesting in light of the bank runs at FDIC-insured banks that unfolded just weeks after the Fed wrote the January 27 Custodia order.) In the Custodia order, the Fed four times said: “Custodia is not seeking deposit insurance from the FDIC” without once acknowledging that Custodia did seek deposit insurance. That material omission painted Custodia as a bank trying to avoid federal regulation, when in fact the opposite is true.

I’ve written recently on shenanigans at the Fed.  The above five points are downright damning. In particular, point 5 implies that the Fed outright lied in their report denying Custodia membership.

About That Master Bank Application

I have not kept up with changes in the Fed’s regulatory structure.  Luckily, they continue to be transparent on their website.  From the Master Account and Services Database FAQ (hyperlinks removed):

What are Reserve Bank master accounts and services?
Reserve Bank master accounts are accounts in which a Reserve Bank receives deposits for a financial institution, such as a bank or credit union. The Reserve Banks provide financial services to financial institutions much like those that banks and credit unions provide to their customers. These services include collecting checks, electronically transferring funds, and distributing and receiving cash and coin. For additional information on these financial services, please see


The Fed has a monopoly on creating (and destroying) money.  Sadly, they seem to be emulating monopoly behavior in the private sector. 

Share if you feel like it

About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.