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Highlights
- Custodia Bank challenges Fed's ruling with top legal experts.
- Fed cites risk management flaws in denying Custodia's application.
- Legal battle could set precedent for crypto-banks' access to Fed systems.
Custodia Bank, formerly Avanti Bank, has upped its legal fight with the Federal Reserve by engaging the services of former acting solicitor general under President Barack Obama, Ian Gershengorn, and ex-solicitor general of Virginia, Michelle Kallen.
This follows after Custodia demanded the reversal of the Federal Reserve decision denying it direct access to the payment systems and membership in the Federal Reserve system. This step shows that the bank wants to strongly contest the ruling, which it sees as a vital impediment to its activities and expansion in the digital asset area.
"Now, @custodiabank is pulling out some big guns to fire back…“This team brings a deep understanding of #federalism issues & extensive experience in federal regulation of [#digitalassets]. They also have a stellar appellate track record in government controversy cases.”" https://t.co/O6pFi8accC
— Caitlin Long 🔑⚡️🟠 (@CaitlinLong_) May 6, 2024
The fact that the legal team has extensive knowledge in government regulatory issues and federalism is also likely to enhance Custodia’s appeal. Their recent participation in significant causes, for example, Kallen’s representation of the Select Committee to Investigate the January 6th Attack on the United States Capitol, demonstrates the seriousness with which Custodia approaches this litigation.
Caitlin Long, CEO of Custodia, stressed that the team’s deep experience in federal regulation of digital assets and their successful appellate track record makes them the best choice for this critical legal challenge.
Federal Reserve’s Denial and Custodia’s Response
In January, the Federal Reserve declined Custodia’s applications for a Master Account and Fed Membership, highlighting substantial deficiencies in the bank’s risk management and compliance with the banking law especially relating to money laundering. This verdict followed an 18-month review period in which Custodia contended that the Fed delayed the process of the application illegally and demonstrated prejudice to digital assets.
Of particular concern to the Fed was Custodia’s business model, where it functioned like an uninsured bank but kept cash and other assets to fully back its stablecoin issuance. The central bank claimed that such an approach could escalate the possibility of runs and contagion due to dependence on the volatile market for the crypto assets.
The bank’s idea to release stablecoins backed with cash reserves was the most problematic issue for the bank to get integrated into the Fed’s payment systems. However, the Custodia Bank, last week, filed a notice of intent to appeal against the Federal Reserve’s rejection of its master account application, as reported by Coingape.
Broader Impact on the Crypto Banking Sector
The refusal of the Federal Reserve to approve the application made by Custodia is an echo of a more general regulatory skepticism about the inclusion of cryptocurrency business within the traditional banking system.
This warning has been amplified by the recent actions against other crypto-friendly financial institutions after the infamous failures of Silicon Valley Bank and Signature Bank. These have created further apprehension about the stability of banks with substantial cryptocurrency activities.
Stakeholders in the crypto industry are watching the language of the Fed in relation to stablecoins and the broader implications for banks involved with digital assets. The comments of the Fed indicate a conservative approach to the fact of crypto-banks getting access to essential financial infrastructure, which can become a standard that will affect the approaches of other institutions to digital asset integration.
The legal battle between Custodia and the Federal Reserve plays out in the context of escalating volatility in global banking, especially for entities heavily engaged in cryptocurrencies.
Read Also: India Plans Offline CBDC Accessibility, RBI Governor Says Citing Potential Risks
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