Fed Reserve Cites Crypto Links in Denying Custodia Bank Membership

• According to the bank, this report is 41% longer than the Fed’s longest order.
• In late January, the Fed declined a membership request from Custodia Bank.

In an 86-page report published on March 24. The United States Federal Reserve explained why it had rejected Custodia Bank’s membership application back in January. Among them, the bank’s crypto-related activities also finds a place.

The report claims that the Fed’s board has expressed concerns about banks with business strategies concentrated on a confined segment of the economy. Specifically highlighting the report’s emphasis on banks having a greater proportion of their operations devoted to the cryptocurrency industry.

The report stated:

“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.“

41% Longer Than the Fed’s Longest Order

The report also indicates that Fed members must connect their risk management systems and controls with the activities indicated in their business strategies. Based on the Fed’s inspection, Custodia had not yet built a suitable risk-management structure. For its intended crypto asset-related operations, nor had it tackled the highly linked risks involved with its undiversified business model.

If recognized as a member of the Fed system. Custodia Bank would be further barred to offer crypto-related services. Especially “given the speculative and volatile nature of the crypto-asset ecosystem that is not consistent with the purposes of the Federal Reserve Act.“

According to the bank, this report is 41% longer than the Fed’s longest order on any issue and 14 times longer than the Fed’s previous largest rejection order. In late January, the Fed declined a membership request from Custodia Bank, as well as a second application in February, alleging that its application “was inconsistent with the required factors under the law.”