Fed grounds its denial of Custodia Bank's membership application on AML flaws.

In its judgment, the Federal Reserve Board rejected a digital-first bank's request to join the Federal Reserve System, citing flaws in the bank's anti-money laundering (AML) standards.

In a Friday press statement, the Fed revealed its conclusion involving the Wyoming-based Custodia Bank. Custodia submitted an application in October 2020; if accepted, the Federal Deposit Insurance Corporation (FDIC) would have guaranteed the company's client deposits.

The bank's risk management system, according to the board, was allegedly "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."

However, the board also identified the central problem as the dangers associated with crypto assets.

The Fed reiterated its earlier this month expressed opinion that such activities are "highly likely to be inconsistent with safe and sound banking practices," saying that the firm's unique business model and projected focus on crypto assets "presented significant safety and soundness risks."

The Federal Reserve's decision surprised and disappointed Custodia, which boasts on its website that it is "eligible to connect directly with the Federal Reserve Payment System."

According to Chief Executive Caitlin Long, "Custodia actively sought federal regulation, going above and beyond all requirements that apply to traditional banks. The board’s denial is unfortunate but consistent with the concerns that Custodia has raised about the Federal Reserve’s handling of its applications, an issue we will continue to litigate."

In June, Custodia sued the Fed over the postponed decision on its application.

By fLEXI tEAM