Custodia Bank’s Membership Denied Ties With Crypto Markets, Says US Fed

by · March 25, 2023

The US central bank 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’s board has raised “concerns about banks with business plans focused on a narrow sector of the economy,” with a high concentration of activities related to the crypto industry. The report notes:

“These concerns are further heightened with respect to Custodia because it is an uninsured custodian institution that seeks to focus almost exclusively on providing products and services related to the crypto-asset sector, which presents increased illicit finance and safety and soundness risks.”

The document also states that Fed members must align their risk management systems and controls with the activities described in their business plans. Based on the Fed’s measure, “Custodia had not yet developed an adequate risk management framework for its proposed cryptoasset-related activities, nor had it addressed the highly correlated risks associated with its undiversified business model.”

If accepted as a member of the system, Custodia bank would further be prohibited from operating crypto-related services “given the speculative and volatile nature of the crypto-asset ecosystem” inconsistent 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 the new and unique activities it proposes to undertake – at least until the activities undertaken as a principal are permitted for national banks. […].”

In response to the report, Custodia Bank’s spokesperson Nathan Miller told Cointelegraph that “the recently released Fed order is the result of a series of procedural abnormalities, factual inaccuracies that the Fed refused to correct, and 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 went on to say that “perhaps more attention to areas of real risk would have prevented the bank closures that Custodia was created to avoid. It is a shame that Custodia has to go to the courts to defend its rights and force the Fed to comply with the law.”

The Fed’s report is 14 times longer than its previous longest rejection order, and 41% longer than the Fed’s longest order on any subject, the bank claims. In late January, the Fed rejected a request for membership from Custodia Bank, as well as a second application in February, arguing that the application “was inconsistent with the required factors under the law.”

Update (25 March 16:44 UTC): This article has been updated to include Custodia Bank’s response.