Custodia Bank Enlists Top Legal Experts in Stablecoin Battle Against Fed’s Denial

• Custodia Bank, previously known as Avanti Bank, has engaged the services of ex-Obama solicitor Ian Gershengorn and ex-Virginia solicitor Michelle Kallen in its legal battle against the Federal Reserve.
• The bank is challenging the Fed’s decision to deny it direct access to the payment systems and membership in the Federal Reserve system.
• This legal battle could set a precedent for crypto-banks’ access to Fed systems.

Custodia Bank hires top legal experts in its fight against the Federal Reserve’s denial of its application for direct access to payment systems and Fed membership, potentially setting a precedent for crypto-banks.

Custodia Bank’s Legal Battle

Custodia Bank has enlisted the services of Ian Gershengorn, former acting solicitor general under President Barack Obama, and Michelle Kallen, ex-solicitor general of Virginia, to challenge the Federal Reserve’s ruling. The bank is demanding the reversal of the Fed’s decision, which it sees as a significant obstacle to its activities and expansion in the digital asset area.

Reasons for Fed’s Denial

The Federal Reserve cited substantial deficiencies in Custodia’s risk management and compliance with banking law, particularly in relation to money laundering, as reasons for denying the bank’s application. The Fed also expressed concerns about Custodia’s business model, which operates like an uninsured bank but keeps cash and other assets to fully back its stablecoin issuance. This approach, according to the Fed, could increase the risk of runs and contagion due to dependence on the volatile crypto asset market.

Implications for the Crypto Banking Sector

The Fed’s refusal to approve Custodia’s application reflects a broader regulatory skepticism about integrating cryptocurrency businesses into the traditional banking system. This skepticism has been heightened by recent actions against other crypto-friendly financial institutions following the failures of Silicon Valley Bank and Signature Bank. Stakeholders in the crypto industry are closely watching the Fed’s stance on stablecoins and its broader implications for banks involved with digital assets.

Conclusion

The outcome of Custodia’s legal battle against the Federal Reserve could set a precedent for crypto-banks’ access to Fed systems. This case is unfolding against a backdrop of increasing volatility in global banking, particularly for entities heavily involved in cryptocurrencies. The Fed’s conservative approach to crypto-banks’ access to essential financial infrastructure could become a standard that influences other institutions’ approaches to digital asset integration.