The Federal Reserve Board denied the application of a digital-first bank for membership in the Federal Reserve System, citing weaknesses in the bank’s anti-money laundering (AML) protocols as part of its decision.

The Fed announced its conclusion regarding Wyoming-based Custodia Bank in a press release Friday. Custodia applied in October 2020; membership would have ensured its customer deposits would be covered by the Federal Deposit Insurance Corporation (FDIC).

The board said it found the bank’s risk management framework was “insufficient to address concerns regarding the heightened risks associated with its proposed crypto activities, including its ability to mitigate money laundering and terrorism financing risks.”

But the board also pointed to the risks involved with crypto assets as the fundamental problem.

“The firm’s novel business model and proposed focus on crypto assets presented significant safety and soundness risks,” the Fed said, reiterating the view it shared earlier this month that such activities are “highly likely to be inconsistent with safe and sound banking practices.”

Custodia, which touts on its website it is “eligible to connect directly with the Federal Reserve payment system,” expressed surprise and disappointment with the Fed’s decision.

“Custodia actively sought federal regulation, going above and beyond all requirements that apply to traditional banks,” said Chief Executive Caitlin Long in a statement. “The board’s denial is unfortunate but consistent with the concerns that Custodia has raised about the Federal Reserve’s handling of its applications, an issue we will continue to litigate.”

Custodia filed a lawsuit against the Fed in June regarding the delayed ruling on its application.