Custodia Bank’s legal battle against the Federal Reserve Bank of Kansas City has received a positive development, as a U.S. district court has allowed the bank’s challenge to proceed. On Thursday, the court rejected a motion from the Federal Reserve to dismiss the case, granting Custodia the opportunity to present its arguments in court.

While Custodia was initially denied immediate membership with the Federal Reserve, the court stated that the bank could pursue membership through alternative channels. However, the U.S. District Court of Wyoming did not grant Custodia’s request for a “master account” and direct membership with the Fed. Instead, the court ruled that Custodia must continue its claims through normal legal channels.

In a significant development, Custodia Bank has been granted the opportunity to proceed with its lawsuit following a recent court decision. This decision is being widely viewed as a victory for the bank, as it allows them to have their day in court and pursue their legal claims. Retired U.S. Senator Patrick Toomey from Pennsylvania, as well as the state of Wyoming, have expressed their support for Custodia Bank by filing amicus briefs in favor of the bank’s lawsuit. The court’s ruling has opened the door for Custodia Bank to present its case and seek justice in the ongoing legal proceedings.

Court Highlights Plausible Claim Against Federal Reserve

The court’s decision, while refraining from granting immediate relief, placed significant emphasis on the availability of other legal remedies in the case at hand. It acknowledged Custodia’s plausible claim against the Federal Reserve Bank of Kansas City, recognizing the potential involvement of the Federal Reserve Board of Governors in the decision-making process.

While highlighting that seeking relief under the Mandamus Act was not applicable against the Board of Directors, the court clarified that the Administrative Procedure Act provided a more suitable avenue for redress in this particular situation.

In addition to Custodia’s journey, it is worth noting that the court acknowledged Custodia’s argument regarding the potential involvement of the Federal Reserve Board of Governors in the decision-making process.

Court Questions Kansas City Fed’s Role in Custodia’s Account Application

 Although the court indicated that pursuing a claim solely against the Kansas City Fed might not be successful, it found Custodia’s argument plausible. The court specifically cited certain events and their timing, which suggested that the Board of Governors might have played a role in determining the outcome of Custodia’s master account application.

Custodia embarked on its journey in October 2020 by initiating the process of acquiring a master account with the Kansas City Fed. The significance of this step lies in the fact that having a master account enables banks to provide services that are akin to those offered by institutions with such accounts.

In August of the subsequent year, Custodia took another important step by submitting an application for membership with the Fed Board of Governors. This decision placed the bank under the purview of the Federal Reserve, thereby making it subject to their oversight and regulations.

After a lengthy wait of eighteen months, in January 2023, Custodia received rejections in all assessed categories from the Federal Reserve. The central bank cited Custodia’s decision not to federally insure deposits and its reliance on the crypto market as reasons for the denial. The Federal Reserve considered Custodia’s crypto friendliness and its status as a state-chartered bank, rather than a nationally chartered one, as potential risks to the bank itself and its customers.

With the court ruling in favor of Custodia, the bank now has the opportunity to present its arguments and seek justice. The outcome of this case could have significant implications for the relationship between the crypto industry and traditional banking institutions. It sheds light on the regulatory challenges faced by crypto-friendly banks seeking access to mainstream financial services.