Crypto bank Custodia is battling the Kansas City Fed in court. In short, success sets a dangerous precedent for Fed banks to custodian.
A crypto bank custody battle with the Kansas City Federal Reserve over access to critical banking services puts the entire US banking system at risk.
That according to a Briefly 11 other Federal Reserve Banks in the country filed in court on Wednesday as part of the Custodia Appeals case.
The ability to prevent risky banks from accessing the Fed system is “a fundamental and universal risk-management tool inherent in banking,” the brief said.
“The position of Custodia finds no support in law or logic and the Court must reject it.”
In short, if the regional banks custodia wins its case, the Federal Reserve will be forced to grant access to all banks — no matter how volatile.
These are banks that can facilitate money laundering, fail to prevent hacks, transact with other volatile businesses, experience significant downtime in their systems and suffer a host of other risks, they argue.
The fight highlights the crypto industry's complaints that the US regulatory establishment has shut them out of essential banking services.
Some labeled it a conspiracy and compared it to Operation Choke Point, which was used during the Obama administration to cut off banking services to industries like gun manufacturers and porn providers.
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Beginning of Wyoming
Caitlin Long founded Custodia to fill this gap in crypto banking.
The firm received a license to custody crypto in 2020 under Wyoming's industry-friendly laws.
Custodia applied to its regional central bank, the Kansas City Fed, for access to the master account.
The Kansas City Fed is one of 12 regional banks that serve as an operating arm of the Federal Reserve.
They are effectively the banker's banks, supplying America 4,500 small banks With access to Fed liquidity and payments systems.
A master account grants access to these services. Without one, the bank must transact through go-betweens.
After fruitlessly waiting for the Master Account, the Custodia filed suit against the Kansas City Fed in 2023, as the depository institution, requiring it to be granted a Master Account.
The bank argued to the contrary – that while depository institutions could be granted master account access, it was not required to do so.
Federal Reserve Later said Custodia has shortcomings in risk management practices such as exposure to crypto, a narrow and volatile sector of the economy.
Custodia lost its case and appealed in April.
Powerful allies
Custodia has some powerful allies. Both are former Solicitor Generals Briefs were filed in support, echoing claims that the situation is “akin to Choke Point 2.0.”
Meanwhile, Custodia's court battle took a toll on the business Had to remove Nine of its 36 employees.
Long recently told News that the custodian “works with both hands tied behind our bank's back.”
“We are troubled by what the Fed has done to us.”
Joanna Wright writes about policy and regulation. Reach her at [email protected].
