FameEX Hot Topics | Federal Reserve Criticizes Custodia Bank for Endangering the Crypto Industry and Its Own Stability

The Federal Reserve has raised concerns about Custodia Bank's approach to the crypto industry in an 86-page document released on Friday. Custodia Bank, formerly known as Avanti, is a Wyoming state-chartered special depository institution that applied to become a member of the Federal Reserve System and obtain a Federal Master account. However, the Fed rejected Custodia Bank's application for membership in January 2023 after an 18-month review process. Custodia Bank filed a lawsuit against the Fed in June 2022 over its master account application, which is still pending.

The Fed stated at the time of the rejection that it was due to significant risks surrounding Custodia Bank's business model and insufficient risk management systems. Its recent statement delved further into explaining those reasons. The Fed's concerns regarding Custodia Bank's approach can be classified under four headings: managerial factor, financial factor, corporate powers factor, and convenience and needs factor. The Fed emphasized that Custodia Bank does not have adequate risk management systems and controls suitable for the crypto industry that it chooses to serve.
In the document, the Fed elaborated on its concerns regarding Custodia Bank's managerial factor. It stated that Custodia Bank has inadequate board oversight, weak internal controls, and an inexperienced management team. The Fed also expressed concerns about the lack of separation between Custodia Bank's management team and the crypto platform it operates.

Regarding the financial factor, the Fed raised concerns about Custodia Bank's insufficient capital levels to support its business model. It also highlighted Custodia Bank's inability to meet the Fed's capital adequacy standards. The Fed also expressed concerns about Custodia Bank's corporate powers factor, stating that Custodia Bank lacks a clear legal framework to govern its operations. The Fed emphasized that Custodia Bank's inability to adequately protect customer assets could pose significant risks to the stability of the financial system. Finally, the Fed raised concerns about Custodia Bank's convenience and needs factor. The Fed stated that Custodia Bank's business model does not align with the needs of the broader financial system, and its services could be accessed by only a limited number of clients.

In conclusion, the Fed's recent document highlights its significant concerns about Custodia Bank's approach to the crypto industry. The Fed's rejection of Custodia Bank's application for membership and the ongoing lawsuit against the Fed demonstrates the significant challenges Custodia Bank faces in its efforts to obtain a Federal Master account.

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