Crypto market ties exclude Custodia Bank from Fed

The United States Federal Reserve published an 86-page report on March 24 describing the grounds for rejecting Custodia Bank’s membership application in January, including the bank’s engagement in the cryptocurrency market. The report notes:

“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.”

According to the source, the Fed’s board has expressed “concerns about banks with business strategies centered on a restricted area of the economy” with a high concentration of crypto-related operations.

The paper also indicates that Fed members must connect their risk management systems and controls with the activities outlined in their business goals, as mentioned in the report.

“Custodia had not yet built a suitable risk-management framework for its intended crypto asset-related operations, nor had it addressed the highly linked risks connected with its undiversified business model,” according to the Fed’s assessment.

If approved as a System member, Custodia Bank would be further prohibited from operating crypto-related services. ” Given the speculative and volatile character of the crypto-asset ecosystem, this is inconsistent with the Federal Reserve Act’s objectives. The report states:

“Further, if the Board were to approve Custodia’s membership application, it would prohibit Custodia from engaging in a number of the novel and unprecedented activities it proposes to conduct—at least until such time as the activities conducted as principal are permissible for national banks.”

In reaction to the story, a spokeswoman for Custodia Bank said that the “recently revealed Fed decision is the consequence of multiple procedural irregularities, factual mistakes that the Fed refuses to clarify, and a general prejudice against digital assets.”

Miller said that the move demonstrates the Fed’s “lack of foresight and incapacity to adjust to shifting markets.” Miller continued by saying, “Maybe a greater focus on areas of actual risk would have averted the bank failures Custodia was designed to prevent.

Unfortunately, Custodia has gone to court to defend its rights and force the Fed to comply with the law.

The Fed’s report is fourteen times longer than its previous largest rejection order and forty-one percent longer than any other topic, according to the bank.

The Fed refused Custodia Bank’s membership application in late January and a second application in February because its application “was inconsistent with the requisite elements under the statute.”