Wyoming-based Custodia Bank’s application to become a member of the Federal Reserve System was rejected earlier this year by the Kansas City Fed. But the platform has no intention of backing down.
The legal dispute took a new turn after Custodia slapped three lawsuits against the regulator in three separate circuits. According to attorney John Deaton, Custodia’s fight against the Feds is “arguably just as important (if not more)” as the Ripple-XRP case.
Custodia vs. Feds
Custodia was founded by Morgan Stanley veteran Caitlin Long in 2020. The platform offers a bridge between digital assets and the US dollar system. In its lawsuit, Custodia accused the Federal Reserve of unlawfully delaying its application for a so-called master account, which happens to be an important component necessary to effectively participate in the US financial ecosystem.
After moving to court, Custodia notched a key win as Wyoming Federal Judge denied the Federal Reserve’s bid to dismiss its lawsuit against it. As for the Fed, its official reason for denial was concerns over Custodia’s short history and what the institution considers to be a problematic business model – that involves primarily fees, such as for storing crypto tokens, instead of investments, by lending out customer deposits.
The Fed even released an 86-page order explaining its decision in March. Its argument centers around Custodia Bank’s business model being “too risky,” indicating the platform lacks FDIC deposit insurance, which is used to make deposit holders whole in the event of a bank failure.
In short, the Fed disapproves of Custodia accepting crypto assets as deposits due to the “speculative and volatile nature of the crypto-asset ecosystem.”
Case of Power Grab
Custodia maintained that the dispute is a clear case of a power grab by the Fed and is looking forward to the court’s review.
In a new tweet, Deaton also echoed a similar sentiment when he said that the Custodia vs. Fed case is as important as the Ripple vs. SEC battle, in which the blockchain firm scored a partial victory. The attorney believes the Custodia lawsuit serves as a clear example that major regulators have been neglecting their statutory obligations.
Deaton further added that the court cases are threatening to end the Federal Reserve’s “arbitrary and capricious conduct.”
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