Custodia Bank Wins Early Legal Battle Against the Fed
In the ongoing lawsuit between digital asset bank Custodia and the Federal Reserve, the Wyoming federal court has denied the Feds and the Federal Reserve Bank of Kansas City's motions for dismissal. The lawsuit, filed in June 2022, alleged that the Federal Reserve unlawfully delayed the processing of Custodia's master account application.
Origins of Custodia Bank and the Application Delay
Founded by Caitlin Long, a former Morgan Stanley executive and Bitcoin advocate, Custodia Bank was created to serve crypto companies by offering account services and as a conduit to the US dollar. The bank applied for a Federal Reserve master account in October 2020. However, it claims that the Federal Reserve has unlawfully delayed its application process.
Fed's Rejection and Its Impact on Custodia's Operations
In January 2023, the Federal Reserve denied the membership application, citing inconsistencies with the required legal factors, pointing toward the bank's involvement with cryptocurrency. This rejection hinders Custodia's ability to utilize the Fedwire network, the Federal Reserve's payment system, which processed over 196 million transactions the previous year.
Wyoming's Support of Blockchain Banks Amid Regulatory Challenges
Custodia was one of Wyoming's pioneering Special Purpose Depository Institutions (SPDIs), or "blockchain banks." These institutions cater to businesses denied Federal Deposit Insurance Corporation banking services due to their involvement in cryptocurrency. The State of Wyoming recently intervened in the case, supporting its regulatory framework, which enables specific crypto firms to qualify as state-chartered banks.
Custodia's Critique of the Fed's Interpretation of Federal Laws
According to Nathan Miller, a spokesperson for Custodia Bank, the Fed needs to be more accurate with federal laws, claiming authority it never received from Congress. "The Fed has never held such authority in US history, nor does it need the discretion to block banks that already have been validly chartered by state banking authorities," stated Miller, adding that the bank looks forward to the court's review of what they term as the Fed's "power grab."
