Fed Warns That Custodia Suit Could Upend 'Careful Balance' of Authority

Source: American Banker

The Federal Reserve is using Custodia Bank's own marketing materials to refute the company's claim that it poses no new risks to the central bank's payment system.

The Fed pointed to Custodia press releases in which the Wyoming-chartered institution describes itself as a "first-of-its-kind digital asset bank" and details its plan to launch a stablecoin as evidence that the firm's business model warrants more time to scrutinize than that of a traditional bank.

"In sum, Custodia's request raises technical, complex, and novel issues that present risk to" the Federal Reserve Bank of Kansas City "and that potentially have implications for the stability of our nation's payment system," the Fed stated in a U.S. District Court of Wyoming filing on Tuesday.

The filing is the latest in Custodia's lawsuit with the Fed over the company's pending application for membership and a master account with the Kansas City Fed. If granted an account, Custodia would be able to make deposits into the Federal Reserve System and access its payment networks.

Custodia, a digital asset custody and payment provider, filed its suit against the Fed in June. It seeks a court order compelling the central bank to make a decision on its master account application, which has been pending for nearly two years.