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Custodia sues the Fed, alleging “favoritism” after it granted BNY Mellon a master account

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(Kitco News) - Custodia Bank, a digital assets bank located in the U.S., has filed a petition in a Wyoming court that alleges “favoritism” and a “lack of respect” by the Board of Directors of the Kansas City Fed after it granted BNY Mellon approval for a Fed master account while denying the same to Custodia for nearly two years. 

BNY Mellon revealed the launch of its new Digital Asset Custody platform on Tuesday, noting that it was the first large U.S. bank to offer custody services for cryptocurrencies alongside traditional investments. 

The announcement elicited a strong reaction from Caitlin Long, the founder of Custodia Bank, who roiled against the now 24-month waiting period that the bank has experienced since originally submitting an application for a Federal Reserve master account in October 2020. 

“We applied to become a Fed member bank, totally committed to complying with all the requirements of becoming a federally regulated Fed member bank,” Long said, “But what’s fascinating is that the bank regulators and the SEC have just been allergic to this whole concept of having banks or broker-dealers be involved.”

Long heightened the fact that just last week, the Federal Reserve released a paper that discussed the risks crypto posed to the financial system, only to turn around and allow a Federal Reserve-supervised bank holding company to enter the crypto arena. 

“We’ve been waiting two and a half years for that, and look at what the Fed actually said last week versus what they did today,” Long stated. “You will see a filing in that lawsuit pertaining to that announcement.” 

A Fed master account would allow Custodia to access the Federal Reserve payment systems without using a third-party bank, enabling it to deposit funds with the Fed and be connected directly to the global financial system. 

Custodia previously filed a suit against the Fed in June, alleging that the central bank was unlawfully delaying its application. 

Federal Reserve releases guidelines that could finally allow crypto banks to get "master accounts"

In its defense, the Fed has asserted that granting a master account to banks that offer custodial services for digital assets poses a risk to the global financial system, justifying the need for an extended period of time to review applications fully. The Central bank published its final guidance for master account access in August. 

In the newly filed suit, Custodia claims that BNY’s approval “directly refutes the central argument advanced by [the Fed].”

“If holding custody of digital assets poses ‘novel, precedent-setting risk’ to the United States financial system, as defendants suggest in their motions, then the board could have – indeed, should have – prevented BNY from engaging in such activities, especially since BNY is a global systematically important bank," Custodia argued.

Custodia is not looking to be granted any sort of relief from the Court, it is only asking that the press release from BNY announcing its digital asset custody platform be thoroughly examined. 

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