Wyoming Advances Custodia Bank’s Lawsuit

A Wyoming federal magistrate denied dismissal motions from the Federal Reserve and the Federal Reserve Bank of Kansas City, thereby advancing Custodia Bank’s legal case against the Federal Reserve.

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.

Caitlin Long, a former employee of Morgan Stanley and an early proponent of Bitcoin, founded the bank in 2020 to provide account services for crypto companies and act as a conduit to the U.S. dollar.

“Again, the Federal Reserve’s latest motion to dismiss Custodia Bank’s lawsuit was denied.

“We are pleased that the Fed’s attempt to veto state bank chartering decisions will now be tested in federal court,” said Nathan Miller, a spokesman for Custodia Bank.

In October 2020, Custodia submitted an application for a master account with the Federal Reserve. If approved, the bank could utilize the Federal Reserve’s FedWire network payment system, which processes more than 196 million transactions annually.

The Fed denied the membership application in January 2023, citing the bank’s involvement in the cryptocurrency space as “inconsistent with the required factors under the law.”

Custodia was among the first Special Purpose Depository Institutions (SPDIs) in Wyoming, also known as “blockchain banks.”

SPDIs were created to serve businesses unable to obtain financial services from the Federal Deposit Insurance Corporation (FDIC) due to their cryptocurrency transactions.

Wyoming requested to intervene in the case between the bank and the Fed in April, defending its framework that permits certain crypto firms to qualify as state-chartered banks.

After decades of automatically awarding master accounts to chartered banks, the Fed, according to Miller, is reinterpreting federal laws to grant itself special authority it never received from Congress.

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

“We look forward to the court’s review of this power grab by the Fed,” he said.