US court rejects Fed's motion to dismiss Custodia Bank case

Custodia Bank won a step forward in its legal battle against the Federal Reserve, as a Wyoming federal judge denied dismissal motions from both the Fed and the Federal Reserve Bank of Kansas City.

The digital asset bank sued the Federal Reserve in June 2022, claiming an “unlawful delay” in processing an application for its master account. In 2020, Caitlin Long, former Morgan Stanley and an early proponent of Bitcoin, founded the bank to provide account services for crypto companies and serve as a bridge to the United States dollar.

“The Federal Reserve’s latest motion to dismiss Custodia Bank’s lawsuit was once again rejected. We are pleased that the Fed’s attempt to provide itself a veto over state bank chartering decisions will now be tested in federal court,” Nathan Miller, a spokesperson for Custodia Bank, told Cointelegraph in a statement.

Custodia submitted an application for a Federal Reserve master account in October 2020. The application, if granted, would enable the bank to use the Federal Reserve’s payment system, the FedWire network, which processed over 196 million transactions last year. In January 2023, the Fed denied the membership application, saying it was “inconsistent with the required factors under the law” and citing the bank’s involvement in the crypto space.

Custodia was one of Wyoming’s first Special Purpose Depository Institutions (SPDIs), also known as “blockchain banks.” SPDIs were created to serve businesses unable to secure Federal Deposit Insurance Corporation (FDIC) banking services due to their dealings with cryptocurrency. In April, the state of Wyoming requested to intervene in the case between the bank and the Fed, defending its framework allowing certain crypto firms to qualify as state-chartered banks.

According to Miller, the Fed is reinterpreting federal laws to grant itself special authority that it never received from Congress after decades of automatically granting master accounts to chartered banks.

“The Fed has never held such authority in U.S. history, nor does it need discretion to block banks that already have been validly chartered by state banking authorities that rigorously separate the wheat from the chaff,” Miller continued, adding that Custodia received its bank charter after more than 150 prospective applicants were rejected by the Wyoming Division of Banking. “We look forward to the court’s review of this power grab by the Fed,” he stated.

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