Order details concerns that crypto firm, seeking Fed membership, could pose ‘significant risk’ to its community

Approval of a Wyoming crypto firm’s proposed application for membership in the Federal Reserve System could pose a “significant risk” to the community it wants to serve, according to an order denying the application issued in January but only published, in a redacted version, Friday.

On Jan. 27, the Fed issued an order denying the application of Custodia Bank, Inc., Cheyenne, to join the Fed system. The Fed described Custodia as a special purpose depository institution, chartered by the state of Wyoming, which does not have federal deposit insurance. The Fed also said the bank proposed to engage in “novel and untested crypto activities that include issuing a crypto asset on open, public and/or decentralized networks.”

The January order indicated that the Fed had “made clear that such crypto activities are highly likely to be inconsistent with safe and sound banking practices.” It also noted in January that it found that Custodia’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.”

In the order details released Friday, the Fed wrote that it had considered the purported benefits of the firm to its community – and found those benefits wanting.

“Custodia has not demonstrated that it could operate in a safe and sound manner, which is a necessary precondition to being able to meet the convenience and needs of its community,” the order states. “Instead, the current record indicates Custodia could in fact pose significant risk to its community. It is also unclear whether Custodia would be able to comply with any applicable consumer protection requirements given the inherent features of its intended business model.”

The order also stated that inconsistency with any of the factors of managerial, financial, and corporate powers “is sufficient to warrant denial of Custodia’s application, and other factors the Board is required to consider under the Act do not lend sufficient weight to warrant approval of Custodia’s application.”

Federal Reserve Board publishes its order denying the application by Custodia Bank, Inc., to be supervised by the Federal Reserve