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Judge Rules Against Digital Asset Bank Custodia’s Bid for Federal Reserve Master Account

Custodia Bank, a digital asset bank, faced a setback as the United States District Court for the District of Wyoming denied its request for a U.S. Federal Reserve master account. Despite this ruling dismissing Custodia’s plea for a declaratory judgment, the bank remains resolute and is actively considering all available avenues.

A spokesperson for Custodia Bank affirmed, “We are carefully evaluating the court’s decision and exploring all possible courses of action, including the option of an appeal.” This statement reflects the bank’s determination to persist in its pursuit of resolution.

Judge Rejects Custodia’s Request for Master Account

On March 29, in the court filing, Judge Scott Skavdahl dismissed Custodia’s plea for a Federal Reserve master account. This account, commonly known as a “bank account for banks,” facilitates financial institutions’ access to the Federal Reserve’s payment systems.

Custodia contended that without this master account, it would be disadvantaged compared to other banks in providing custodial services for crypto-assets. According to the bank, lacking such an account would force Custodia to rely on and adhere to an intermediary bank, effectively relegating it to a “second-class citizen” status in the banking landscape.

Furthermore, Judge Skavdahl ruled that Custodia cannot overturn the decision made by the Federal Reserve Bank of Kansas City (FRBKC), stating, “Custodia is not entitled to its requested writ of mandamus compelling FRBKC to issue its master account, and summary judgment on Claim II must be granted in FRBKC’s favor.”

Custodia Bank initially applied for a Federal Reserve master account in October 2020. If approved, this account would have provided the bank with access to the Fedwire network, which processed over 193 million transactions in 2023.

However, in January 2023, Custodia’s membership application was declined by the Federal Reserve, citing its involvement in the crypto space as inconsistent with the required factors under the law.

Custodia Bank, identified as one of Wyoming’s pioneering Special Purpose Depository Institutions (SPDIs), often referred to as “blockchain banks,” was established to offer assistance to businesses experiencing challenges in securing banking services from the Federal Deposit Insurance Corporation due to their involvement in crypto-related activities.

Collapse of Crypto-Friendly Banks in 2023

In 2023, the United States experienced the failure of four major lenders, namely Silvergate Bank, Signature Bank, Silicon Valley Bank, and First Republic Bank.

The failures of Silvergate and Signature Bank were partially attributed to the crypto meltdown of 2022.

In addition to these larger institutions, Heartland Tri-State Bank, a community bank situated in Elkhart, Kansas, was compelled to cease its operations last year. This decision came after its CEO, Shan Hanes, fell victim to a cryptocurrency scam, resulting in significant financial losses.

The unfortunate sequence of events began when Hanes, eager to recoup his funds from what he believed to be a legitimate cryptocurrency investment, made an unusual request to one of his affluent clients. He asked the client to lend him $12 million, promising to repay the loan with an additional $1 million in interest within just 10 days.

Hanes claimed that he was investing in cryptocurrency with the assistance of a third party and alleged that there were complications with wire payments that necessitated additional funding.

However, subsequent investigations revealed that Hanes had indeed wired the $12 million as claimed. This discovery prompted the Kansas Office of the State Bank Commissioner to launch an inquiry into the bank’s affairs, ultimately leading to the declaration of insolvency for Heartland Tri-State Bank.

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I want to save money. Will cryptocurrency work?

Cryptocurrency is essentially virtual money that operates in a decentralized manner, not through a bank but directly on multiple independent computers.

Every cryptocurrency has two main components: the units of digital exchange called “coins” and the network within which the exchange takes place. These units can be transferred between wallets and exchanged on exchanges. The networks in which these coins exist are called blockchains, which translates to “chains of blocks.”

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