Digital Asset Bank Custodia Files Petition in US Court Over BNY Mellon's Crypto Approval

Digital assets bank Custodia Bank has filed a petition in a U.S. court in Wyoming over what it calls "favoritism" and a "lack of respect" by the Board of Directors of the Kansas City Fed in allowing BNY Mellon (BK) to engage in crypto custody but not granting Custodia approval for a Fed master account.

Custodia, which was formerly known as Avanti Bank, said it has been waiting for 19 months to hear back from the Fed on its approval for a master account. Master accounts would allow Custodia to deposit funds with the Fed and be connected directly to the global financial system.

By virtue of being a well-established bank, BNY would have a master account with the Fed. The bank announced on Tuesday it would allow certain institutional clients access to the new service.

Without a master account, institutions like Custodia would need to use an intermediary bank and be subject to that bank's rules, regulations, and fee structure. In June, Custodia filed suit against the Fed alleging that the U.S. central bank was unlawfully delaying its application and has the support of a number of Republican lawmakers.

“Last week, the Federal Reserve told a federal judge that keeping custody of digital assets, like bitcoin, posed a ‘novel, precedent-setting risk.’ This week, the Fed allowed BNY Mellon to do the exact same thing. So it has one rule for innovators like Custodia Bank, and another for the nation’s oldest bank,” said Nathan Miller, a spokesperson for Custodia Bank, in an email to CoinDesk. “After waiting more than 24 months, we are seeking nothing more than fair and equal treatment.”

For its part, the Fed has argued that granting master accounts to banks that provide custodial services for digital assets poses risks to the global financial system and thus it needs additional time to evaluate their applications fully. In August, the Fed published its final guidance for master account access which involves multiple tiers of access.

In its petition, Custodia said 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 seeking any sort of relief from the Court, only for it to examine a press release from BNY Mellon announcing its digital asset custody platform. The petition is part of the ongoing suit.

CORRECTION (Oct. 13, 2022, 21:40 UTC): Amends headline to clarify Wednesday's filing is part of an ongoing lawsuit, and not a new legal action.

UPDATE (Oct. 14, 2022, 16:20 UTC): Clarifies that not all BNY Mellon customers can access the new service.