Custodia Bank Takes First Step To Win Its Lawsuit With The Fed

Key Points:

• Custodia Bank advanced in its legal fight against the Federal Reserve when a federal court in Wyoming dismissed dismissal requests from the Fed and the Federal Reserve Bank of Kansas City.
• The bank claims the Federal Reserve unjustly delayed its application for a so-called master account in its June 2022 lawsuit.
• Custodia saw the latest verdict in its struggle with the Fed as a significant victory.

Custodia Bank advanced in its legal fight against the Federal Reserve when a federal court in Wyoming dismissed dismissal requests from both the Fed and the Federal Reserve Bank of Kansas City. Custodia must instead pursue its claims via the appropriate routes.

In June 2022, the digital asset bank filed a lawsuit against the Federal Reserve, alleging an “unlawful delay” in processing an application for its master account.

Custodia Bank, formed in 2020 by Morgan Stanley veteran Caitlin Long, was created to serve as a link between digital assets and the US currency system.

The bank would have access to the FedWire network, which processed nearly 200 million transactions totaling more than $1 quadrillion in 2022.

Custodia Bank applied for a Federal Reserve master account in October 2020. If approved, the bank would be permitted to utilize the Federal Reserve’s payment system, the Fedwire network, which handled over 196 million transactions last year.

Patrick Toomey, the former senator from Pennsylvania, tweeted on Friday afternoon that Custodia Bank will have its day in court. Toomey, together with the state of Wyoming, submitted amicus briefs to back Custodia’s lawsuit.

The Fed declined the membership application in January 2023, citing the bank’s engagement in the crypto industry as inconsistent with the requisite elements under the statute. The crypto bank has revised its case to ask whether the Fed has the right to prevent Custodia from obtaining a master account.

Custodia Bank was one of Wyoming’s first SPDIs, or “blockchain banks.” SPDIs were designed to assist firms who were unable to get Federal Deposit Insurance Corporation banking services owing to their crypto activities. Wyoming sought intervention in the lawsuit between the bank and the Fed in April, defending its structure that allows some crypto businesses to qualify as state-chartered banks.

The district court also said that Custodia’s claim would fail if the Kansas City Fed had been the only denial of his master license. The court, on the other hand, found Custodia’s contention that the Fed Board of Governors had weighed in on the decision believable.

The bank says it has yet to get a response to its application, citing the fact that the Federal Reserve’s lack of communication has delayed its development owing to the uncertainty.

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