Fed details Custodia Bank membership rejection over risk deficiencies

In its decision published Friday, the Fed said its review of Custodia’s application found “significant deficiencies” in the bank’s “risk management and controls for its core banking activities.”

The Fed previously announced its denial of Custodia’s application in January, ruling at the time the bank’s proposed activities would be “highly likely to be inconsistent with safe and sound banking practices.” Custodia is a state-registered bank in Wyoming.

“As of the time of the pre-membership examination, Custodia had not yet developed a sufficient risk management framework for its proposed crypto asset-related activities, nor had it addressed the highly correlated risks associated with its undiversified business model,” the Fed’s decision said. “Indeed, some products that are estimated to be significant sources of revenue were still in the ‘conceptualization phase,’ and policies, procedures, and processes related to planned crypto asset-related activities remained in the early stages of development, especially in the area of compliance.”

The Fed also didn’t like Custodia’s concentration in cryptocurrency, an industry with noted volatility.

In a statement, Custodia said the denial demonstrated the Fed’s “shortsightedness and inability to adapt to changing markets” and that it would sue the agency.

Custodia cited the recent failures of Silicon Valley Bank and Signature Bank to underscore why its bank model should be more favorably viewed.

“Perhaps more attention to areas of real risk would have prevented the bank closures that Custodia was created to avoid,” the statement said. “It is a shame that Custodia must turn to the court to vindicate its rights and compel the Fed to comply with the law.”