The United States Federal Reserve released an 86-page report on March 24 detailing the reasons for rejecting Custodia Bank’s application for membership in January, including the bank’s involvement in the crypto space.
According to the report, the Fed board has raised “concerns about banks with business plans focused on narrow sectors of the economy”, with a high concentration of activities related to the crypto industry. The report noted:
“These concerns are heightened regarding Custodia because it is an uninsured depository institution that is almost exclusively focused on offering products and services related to the crypto-asset sector, which presents financial risks and unauthorized safety and health.”
The document also states that Fed members must align their risk management and control systems with the activities described in their business plans. Based on the Fed’s authority, “The Custodian has not developed an adequate risk management framework for activities related to the proposed crypto-assets, nor has it addressed the risks associated with a non-diversified business model.”
If accepted as a member of the System, the Custodia bank will be further prohibited from opening crypto-related services “given the speculative and volatile nature of the crypto-asset ecosystem” which is inconsistent with the objectives of the Federal Reserve Act. the report states:
“Furthermore, if the Council will approve the application of Custodia members, it will prohibit Custodia from participating in some novel and unprecedented activities that propose to do-at least until that time the activities carried out as principals are allowed for national banks. […].”
In response to the report, Custodia Bank spokesperson Nathan Miller told Cointelegraph “the recently released Fed order is the result of numerous procedural irregularities, factual inaccuracies that the Fed refuses to correct, and a general bias against digital assets.”
Miller also noted that the decision is a demonstration of the Fed’s “shortsightedness and inability to adapt to market changes.” Miller further said that “perhaps more attention to real risk areas will prevent the closure of banks that Custodia was created to avoid. It is a shame that Custodia has to turn to the courts to justify their rights and force the Fed to comply with the law. .”
CUSTODIA STANDS FIRMLY IN RESPONSE TO FED pic.twitter.com/xXWGjffU3I
— Custodia Bank ™ (@custodiabank) March 24, 2023
The Fed’s report was 14x longer than the previous longest denial order, and 41% longer than the Fed’s longest order on any subject, the bank said. In late January, the Fed rejected Custodia Bank’s membership request, as well as a second application in February, stating that the application was “inconsistent with the factors required by law.”
Update (on March 25, at 4:44 pm UTC): This article has been updated to include Custodia Bank’s response.