Friday’s 86-page release is the first instance where the central bank has elaborated on the reasoning behind the rejection of Custodia Bank’s membership application.

Custodia's membership application and its application for a master account were denied in January, after 18 months since the applications were first filed.

When institutions apply to join the Fed system or obtain other charters, bank regulators conduct an examination. In the case of Custodia, the Fed board gave it a failing grade on its pre-application exam. Although the rejection was announced weeks earlier, the order was only published later due to the central bank's practice of redacting sensitive information regarding business plans.

“In general, the Board has heightened concerns about banks with business plans focused on a narrow sector of the economy,” the Federal Reserve Board said in the released decision document. “Those concerns are further elevated with respect to Custodia because it is an uninsured depository institution seeking to focus almost exclusively on offering products and services related to the crypto-asset sector, which presents heightened illicit finance and safety and soundness risks.”

 “...findings indicated Custodia’s risk management and controls for its core banking activities were insufficient, particularly with respect to overall risk management; compliance with the Bank Secrecy Act and U.S. sanctions; information technology; internal audit; financial projections; and liquidity risk management practices.” the Fed concluded.

The Federal Reserve was concerned about Custodia's "deficiencies" and their "novel" business model which mainly involved crypto-related activities and lacked federal deposit insurance. The Fed desccribed Custodia’s plan as “an unprecedented business model that presents heightened risks involving activities that no state member bank previously has been approved to conduct.”

Additionally, the Fed's Board of Governors expressed skepticism about Custodia's future profitability.

“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,” the Board of Governors said.