The United States Federal Reserve recently released an 86-page report detailing the reasons for denying Custodia Bank’s application for membership in January, including the bank’s involvement in the crypto space. According to the report, the Fed’s board 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 document also states that Fed’s members must align their risk management systems and controls with the activities described in their business plans.
Based on the Fed’s purview, “Custodia 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.” If accepted as a member of the System, Custodia bank would be further forbidden to run 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.”
In response to the report, Custodia Bank’s spokesperson Nathan Miller told Cointelegraph that the “recently released Fed order is the result of numerous procedural abnormalities, factual inaccuracies that the Fed refused to correct, and general bias against digital assets.” Miller also noted that the decision is a demonstration of the Fed’s “shortsightedness and inability to adapt to changing markets.”
The Fed’s order is 14x longer than its previous longest denial order, and 41% longer than the Fed’s longest order on any subject, according to the bank. In late January, the Fed denied a membership request from Custodia Bank, as well as a second application in February, claiming that its application “was inconsistent with the required factors under the law.”
Custodia Bank was created to help solve the inadequacies that traditional banks have when it comes to providing custody and other services for digital assets. As the crypto market continues to grow and more traditional institutions are looking to enter the space, Custodia Bank offers a unique perspective and experience in handling these assets.
While the denial of Custodia Bank’s application is a setback for the bank, it is not the end for the institution. Custodia Bank plans to take legal action against the Fed in order to vindicate its rights and compel the Fed to comply with the law.
The Fed’s decision is not all that surprising, given its cautious approach to the crypto industry thus far. Regulators have been hesitant to fully embrace the industry due to concerns over illicit finance and safety and soundness risks. However, as more traditional institutions look to enter the space, it is becoming increasingly difficult to ignore the potential benefits that digital assets can offer.
In order for the crypto industry to continue to grow and mature, it is important for regulators like the Fed to work with innovative institutions like Custodia Bank rather than push them away. While there are certainly risks involved with digital assets, there are also opportunities for economic growth and financial inclusion that should not be overlooked.
In the end, it will be up to both regulators and innovators to find a way to work together in order to build a more inclusive and secure financial system for everyone. As the crypto industry continues to evolve, it is likely that we will see more pushback from regulators, but it is also likely that we will see more institutions like Custodia Bank fighting back in order to ensure that their unique perspective is heard and respected.