Crypto bank Custodia, launched in 2020 by Morgan Stanley veteran Caitlin Long, has been invigorated by a recent ruling from a Wyoming Federal Judge that denied the Federal Reserve’s bid to dismiss the bank’s lawsuit. As a bridge between digital assets and the U.S. dollar system, Custodia is currently authorized to operate as a Special Purpose Depository Institution (SPDI), offering both crypto and traditional banking services. However, it must obtain a so-called master account with the Federal Reserve to fully exercise its banking powers.
In its June 2022 lawsuit, Custodia accuses the Federal Reserve of unlawfully delaying its application for a master account, which is essential for the bank to operate effectively in the U.S. financial system. The bank claims that it submitted its application 19 months ago and has yet to receive a response. A spokesperson for Custodia told Decrypt that the lack of communication from the Federal Reserve has hindered its development due to the uncertainty.
The master account would grant Custodia access to the FedWire network, which processed approximately 200 million transfers totaling over $1 quadrillion in 2022. Custodia believes the Federal Reserve has overstepped its authority by “reinterpret[ing] federal law to hand itself special authority that it never received from Congress.” The spokesperson added, “The Fed has never held such authority in U.S. history, nor does it need the discretion to block banks that already have been validly chartered by state banking authorities that rigorously separate the wheat from the chaff.”
Furthermore, the Wyoming Division of Banking rejected more than 150 prospective applicants before granting Custodia its bank charter, demonstrating the bank’s adherence to regulatory standards. The delay in processing its master account application has impacted Custodia’s entry into the financial services market and forced the bank to partner with a correspondent bank that already possessed a master account.
With the Wyoming Federal Judge’s decision, it seems more likely that the question of whether the Federal Reserve properly handled Custodia’s application will be answered in court. This case brings to light the potential conflicts arising from new technology and innovation in financial services, and the ability of regulators to adapt in a rapidly evolving landscape. As Custodia’s legal battle against the Federal Reserve continues, the outcome could have significant implications for the future of crypto banks and traditional financial institutions alike, underscoring the need for a balance between innovation and regulatory oversight.
Source: Decrypt
