US Fed denies Custodia Bank membership over crypto concerns

blockchain.news:

In its 86-page report released on March 24, the US Federal Reserve denied Custodia Bank's application for membership citing concerns over the bank's involvement in the crypto industry. The Fed 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 states that «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.»

The Fed also noted that Custodia Bank had not yet developed a sufficient risk-management framework for its proposed cryptoasset-related activities, nor had it addressed the highly correlated risks associated with its undiversified business model. The report stated that Fed's members must align their risk management systems and controls with the activities described in their business plans.

If Custodia Bank were to be accepted as a member of the System, it would be further prohibited from running crypto-related services «given the speculative and volatile nature of the crypto-asset ecosystem» that is not consistent with the purposes of the Federal Reserve Act. The report stated that «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 response, Custodia Bank criticized the Fed's decision as shortsighted and an