The Federal Reserve Board argued that Custodia Bank’s proposed business model was “contrary” to approval in an order explaining the denial of the Wyoming-based cryptobank’s application for membership.
Custodia’s application for membership, as well as its application for a master account, was rejected in January, 18 months after the applications were originally submitted. Custodia, formerly known as Avanti Bank, filed suit against the Federal Reserve in June 2022, alleging the central bank was unlawfully delaying its decision, and filed an amended complaint earlier this year alleging a conspiracy by the Fed to block it.
At the time of Custodia’s denial, the Federal Reserve issued a brief statement explaining its position that Custodia’s “new business model and proposed focus on crypto-assets presented significant security and soundness risks” and that the bank did not have a sufficient risk management framework. to address crypto-related risks such as money laundering and terrorist financing.
Friday’s 86-page publication, however, is the first time the central bank has expanded on its reasoning for the denial. The FRB argued that Custodia had inadequate risk management and controls, “particularly with respect to overall risk management; compliance with the Bank Secrecy Act and US sanctions … financial forecasts and liquidity risk management practices.”
The Board also argued that Custodia’s revenue model, which is “predicated almost solely on the existence of an active and vibrant market for crypto-assets” makes it vulnerable to market volatility, although the Board acknowledged that “Custodia appears to has sufficient capital and resources to support initial operations.”
“Recent events, including the bankruptcies of crypto-asset brokers Celsius, Voyager, BlockFi and FTX, have highlighted that the global and largely unregulated or non-compliant crypto-asset sector lacks stability and that shifts in the sector may result under stress in financial institutions. focused on serving the crypto-asset sector,” the Board reasoned.
Among its other concerns, the Board argued that Custodia’s financial plans were “so unfavorable as to present sufficient grounds to warrant rejection of the application,” a statement it reiterated detailing various aspects of Custodia’s application that it contested. .
Custodia has challenged the Fed’s refusal, both through its ongoing lawsuit and in a statement Friday, which called the order “the result of numerous procedural anomalies, factual inaccuracies that the Fed refused to correct and general bias against digital assets”.
“Rather than choosing to work with a bank using a low-risk, fully-reserved business model, the Fed instead demonstrated its own short-sightedness and inability to adapt to changing markets,” the statement said. of Custodia. “Perhaps more attention to areas of real risk would have prevented the bank closures that Custodia was created to avoid. It’s a shame that Custodia has to go to court to vindicate its rights and force the Fed to comply with the law.”
Membership was denied without prejudice, meaning that Custodia would, in theory, be able to reapply for membership in the future.
