Court Allows Custodia’s Lawsuit Against Fed Over Denial of Master Account to Proceed

Custodia Denied Immediate Membership with Federal Reserve, Can Pursue Other Channels

Custodia’s legal challenge against the Federal Reserve Bank of Kansas City’s denial of access to Fed banking services for the crypto-friendly bank has received a favorable ruling.

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On Thursday, a U.S. district court rejected a motion by the Federal Reserve to dismiss the case, allowing Custodia to proceed with their challenge. This ruling indicates that Custodia’s legal battle against the denial of access to Federal Reserve banking services can continue to be pursued.
However, the U.S. District Court of Wyoming did not grant Custodia’s request to compel the Federal Reserve to provide a “master account” and membership. Instead, Custodia will need to pursue its claims through the usual channels.

Retired U.S. Senator Patrick Toomey from Pennsylvania tweeted about the decision on Friday afternoon, stating that Custodia Bank will have its day in court. Toomey, along with the state of Wyoming, filed amicus briefs in support of Custodia’s lawsuit, highlighting their backing of the case.

Also Read: Custodia Bank is planning to launch its Bitcoin custody service

While the court declined to grant Custodia’s request, it clarified that the rejection was based on the availability of an alternative avenue for Custodia to pursue. The court acknowledged that Custodia had presented a credible claim for relief against the Federal Reserve Bank of Kansas (FRBKC).

However, it noted that seeking relief under the Mandamus Act was not applicable against the Board of Directors, as the Administrative Procedure Act (APA) already provides a suitable remedy. The ruling recognized Custodia’s plausible claim for relief while indicating that recourse through the APA would be the appropriate course of action.

Furthermore, the district court acknowledged that if the denial of Custodia’s master license had solely been the decision of the Kansas City Fed, Custodia’s claim would not hold. However, the court found Custodia’s assertion plausible that the Federal Reserve Board of Governors had played a role in the decision-making process.

In its ruling, the court stated that the alleged events and their timing reasonably suggested that the Board of Governors had some level of influence over the outcome of Custodia’s master account application.

This acknowledgment supports Custodia’s claim that the Board of Governors’ involvement impacted the decision regarding their master account application.

In October 2020, Custodia submitted an application to the Kansas City Fed, seeking a master account. A master account is crucial for banks to provide a range of services equivalent to those offered by institutions with such accounts. Subsequently, in August of the following year, Custodia applied to the Fed Board of Governors for membership. If approved, this membership would subject the bank to the oversight and regulatory framework established by the Federal Reserve.

These sequential applications highlight Custodia’s efforts to obtain both a master account and membership with the Fed, which would enhance its capabilities and subject it to appropriate regulatory oversight.

In justifying its rejection, the central bank cited two primary reasons for denying Custodia’s request. First, the bank argued that Custodia’s choice to forgo federal deposit insurance posed a risk to both the institution itself and its customers. Second, the central bank expressed concerns about Custodia’s heavy reliance on the dynamic and volatile crypto market, perceiving it as a potential threat to the bank and its clientele.

By highlighting these factors, the central bank sought to establish the rationale behind its decision to reject Custodia’s application, emphasizing the importance of deposit insurance and the potential risks associated with crypto market dependency.

Also Read: OKX Partners with Nomura-Backed Crypto Storage Firm Komainu as Custodian

Important: This article is intended solely for informational purposes. It should not be considered or relied upon as legal, tax, investment, financial, or any other form of advice.

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