Court rejects Fed’s attempt to dismiss Custodia Bank case.

Custodia Bank has made progress in its legal dispute against the Federal Reserve, as a federal judge in Wyoming denied dismissal motions from both the Fed and the Federal Reserve Bank of Kansas City.

The digital asset bank filed a lawsuit against the Federal Reserve in June 2022, alleging an “unlawful delay” in processing its master account application. In 2020, Caitlin Long, a former Morgan Stanley executive and early Bitcoin advocate, founded the bank to provide account services for cryptocurrency companies and act as a bridge to the US 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,” said Nathan Miller, a spokesperson for Custodia Bank, in a statement to Cointelegraph.

Custodia submitted its application for a Federal Reserve master account in October 2020. If approved, the application would allow 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 rejected the membership application, stating that it was “inconsistent with the required factors under the law” and citing the bank’s involvement in the cryptocurrency 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 US history, nor does it need discretion to block banks that have already 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 over 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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