The US Federal Reserve released an 86-page report on March 24 detailing the reasons for rejecting Custodia Bank’s January membership application, including the bank’s involvement in the crypto space.
According to the report, The Fed board has expressed “concerns about banks with business plans focused on a limited sector of the economy,” with a high concentration of activities related to the crypto industry. The report states:
“Those concerns are further heightened with respect to Custody because it is an uninsured depository institution that seeks to focus almost exclusively on offering products and services related to the crypto-assets sector, which presents greater illicit financial and safety and soundness risks.”
The document also states that Fed members must align their risk management systems and controls with the activities outlined in their business plans. According to the scope of the Fed, “Custodia had not yet developed a sufficient risk management framework for its proposed crypto-asset-related activities, nor had it addressed the highly correlated risks associated with its non-diversified business model”.
If accepted as a member of the System, Custodia Bank would be prohibited from running cryptocurrency-related services “given the speculative and volatile nature of the crypto-asset ecosystem” which is not consistent with the purposes of the Federal Reserve Act,” the report states:
“Furthermore, if the Board were to approve Custodia’s application for membership, it would prohibit Custodia from engaging in a number of novel and unprecedented activities that it proposes to undertake, at least until such activities as a director are permitted for national banks. [ …]”.
In response to the report, Custodia Bank spokesman Nathan Miller told Cointelegraph that “the recently released Fed order is the result of numerous procedural abnormalities, factual inaccuracies that the Fed refused to correct, and a general bias against digital assets”.
Miller also noted that the decision is a demonstration of the Fed’s “myopia and inability to adapt to changing markets.” Miller further said that “perhaps more attention to real risk areas would have prevented the bank closures Custodia was created to serve. It’s a shame Custodia has to go to court to vindicate its rights and force the Fed to comply.” the law”.
CUSTODY STANDS FIRM IN RESPONSE TO THE FED pic.twitter.com/xXWGjffU3I
— Custodia Bank ™ (@custodiabank) March 24, 2023
The Fed’s report is 14 times longer than its previous longest denial order and 41% longer than the Fed’s longest order on any subject, the bank claims. In late January, the Fed rejected a membership application from Custodia Bank, as well as a second application in February, on the grounds that its application “was inconsistent with the factors required by law.”
Update (March 25 4:44pm UTC): This article has been updated to include Custodia Bank’s response.
Clarification: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
Investments in crypto assets are not regulated. They may not be suitable for retail investors and the entire amount invested may be lost. The services or products offered are not directed or accessible to investors in Spain.