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U.S. Fed Denies Custodia Bank Membership Due to Crypto Ties

The US Federal Reserve has denied Custodia Bank's membership application, citing concerns over the bank's strong focus on the crypto industry and insufficient risk-management framework.

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U.S. Fed Releases Report on Custodia Bank Membership Denial

On March 24, the United States Federal Reserve released an 86-page report detailing the reasons for denying Custodia Bank's membership application in January, citing the bank's involvement in the crypto space.

Fed's Concerns Over Banks Focused on Crypto Industry

The Fed's board expressed concerns about banks with business plans focused on a narrow sector of the economy, such as the crypto industry, which presents heightened illicit finance and safety risks. Custodia Bank, asF an uninsured depository institution, raised further concerns due to its exclusive focus on crypto-related services.

Custodia's Insufficient Risk-Management Framework

The Federal Reserve stated that member banks must align their risk management systems and controls with business plans. Custodia had not yet developed a sufficient risk-management framework for its proposed crypto-related activities, nor had it addressed the highly correlated risks associated with its undiversified business model.

Custodia Bank Prohibited from Crypto Services if Accepted

If accepted as a member, Custodia Bank would be forbidden to run crypto-related services due to the speculative and volatile nature of the crypto-asset ecosystem, which is inconsistent with the Federal Reserve Act's purposes.

Custodia Bank's Response to Fed's Report

Custodia Bank spokesperson Nathan Miller responded to the report by criticizing the Fed for procedural abnormalities, factual inaccuracies, and bias against digital assets. Miller also highlighted the Fed's shortsightedness and inability to adapt to changing markets.

Fed's Report Length and Previous Membership Denials

The Fed's report is significantly longer than its previous longest denial and other subject orders. Custodia Bank had its membership request denied in late January, and a second application was rejected in February, with the Fed citing inconsistencies with required factors under the law.