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Fed explains Custodia Bank's exclusion from membership due to risk issues.

As part of the digital-first bank's application to join the Federal Reserve System, the Federal Reserve Board elaborated further on the risk management shortcomings it discovered at Custodia Bank.

The Fed stated in its decision released on Friday that it had "significant deficiencies" in the bank's "risk management and controls for its core banking activities" after reviewing Custodia's application.

The Fed earlier declared in January that it had rejected Custodia's application because the bank's proposed actions would be "highly likely to be inconsistent with safe and sound banking practices.” Custodia is a state-registered bank in Wyoming."

The Fed's decision stated that "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. 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."

Also, the Fed objected to Custodia's focus on the volatile cryptocurrency market.

Custodia declared that it will sue the Fed and that the rejection showed the organization's "shortsightedness and inability to adapt to changing markets."

Custodia emphasized the reasons why its bank model should be more positively perceived by citing the most recent failures of Silicon Valley Bank and Signature Bank.

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



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