Custodia Bank’s legal struggle against the Federal Reserve took a step forward when a Wyoming federal judge rejected the dismissal motions from the Fed and the Federal Reserve Bank of Kansas City.

In June 2022, the digital asset bank filed a lawsuit against the Federal Reserve, alleging an “unlawful delay” in handling its master account application. Back in 2020, Caitlin Long, a former Morgan Stanley executive and early supporter of Bitcoin, founded the bank to offer account services for crypto companies and to act as a link to the U.S. dollar.

“Custodia Bank is pleased that the Federal Reserve’s attempt to exercise a veto over state bank chartering decisions is being challenged in federal court,” Nathan Miller, a spokesperson for Custodia Bank, declared to Cointelegraph in a statement following the rejection of the Fed’s latest motion to dismiss the lawsuit.

In October 2020, Custodia applied for a Federal Reserve master account. If approved, this would have allowed the bank to utilize the Fedwire network, which handled more than 196 million transactions in the previous year. However, in January 2023, the request was refused by the Fed due to the bank’s involvement in the crypto sector, as it was “inconsistent with the required factors under the law”.

Custodia was one of the initial Special Purpose Depository Institutions (SPDIs) in Wyoming, which are also referred to as “blockchain banks.” These SPDIs were created to provide banking services to businesses that could not obtain Federal Deposit Insurance Corporation coverage due to their involvement with cryptocurrency. In April, Wyoming requested to join the legal dispute between the bank and the Fed, defending the regulations that allow certain crypto businesses to be certified as state-chartered banks.

Miller asserts that the Federal Reserve has been reinterpreting federal laws to give itself powers it never received from Congress, despite having for many years routinely issued master accounts to chartered banks.

“The Federal Reserve has never before possessed such power in American history, and it does not possess the prerogative to deny banking privileges to institutions which have been duly authorized by state banking regulators that are known for their thoroughness,” Miller went on to say, further noting that Custodia was granted its banking charter after more than 150 other applicants were turned down by the Wyoming Division of Banking. “We are eager to see the court’s assessment of this attempt by the Fed to expand its authority,” he declared.

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