Custodia Bank, a Wyoming special purpose depository institution providing digital asset custody and other crypto services, has just suffered another setback in its long-running legal battle with the Federal Reserve. The 10th Circuit Court of Appeals has upheld the judgment of the District of Wyoming federal court, which said the Fed has the right to block Custodia from access to its payment rails.
“While we were hoping for a win at the 10th Circuit today, we received the next best thing – a strong dissent,” Custodia Bank’s leaders said in a statement shared with American Banker, noting that appeals courts have been split on this issue. “Custodia has an option to petition for a rehearing by the 10th Circuit, and we are actively considering that.”
Custodia applied for a Federal Reserve master account in 2020, in the hopes of getting direct access to the Fed’s payment system. This would mean Custodia could handle payments directly, without having to go through a partner bank, saving time and money. In 2023, the Fed declined Custodia’s application, citing “deficiencies in Custodia’s risk management and controls framework in relation to Custodia’s limited basic banking activities.”
Custodia sued the Fed in the Wyoming federal district court. According to the bank’s complaint, the Fed sat on its master application for more than 19 months.
“This wholly unlawful delaying conduct is aggravated by the standardless processes the Defendants have apparently adopted, which they have interpreted to allow agencies of the federal government to act in complete secrecy whenever and however they choose with no accountability or rules to govern their decision-making,” Custodia said in its complaint. “This government-in-secrecy has the effect, if not the purpose, of precluding the judicial review required by the most elementary standards of due process of law. Continued delay, in these circumstances, prevents newcomers like Custodia from introducing innovation and competition in the financial services marketplace and, not coincidentally, benefits the established financial institutions whose interests are represented on the Board of Directors of the Kansas City Fed.”
The Wyoming court ruled in favor of the Federal Reserve, upholding the Fed’s discretion to deny a master account to Custodia Bank. The court found that the Federal Reserve Bank of Kansas City had the authority to deny the application and that Custodia had no viable legal claims against either the Board of Governors or the Kansas City Fed.
On Thursday, the 10th Circuit Appeals Court ruled 2-1 for the Fed, affirming its broad discretion to reject such requests without detailed justification.
The backdrop to this is that in addition to Custodia, a large number of crypto companies are trying to get access to the Fed’s rails. Several, including Crypto.com, Ripple, Circle, Coinbase, Paxos and Bridge (a Stripe-owned stablecoin infrastructure provider), have applied for national trust charters from the Office of the Comptroller of the Currency. Fed Governor Christopher Waller has said that companies with such charters, as well as the Wyoming special purpose depository institutions like Custodia and Kraken, will be eligible for proposed
“All eyes now turn to the Fed to see if the agency will provide ‘skinny’ master accounts as proposed by Gov. Waller last week,” said Michele Alt, co-founder and managing director of Klaros Group.
But it’s uncertain exactly who will receive these accounts. “They can request,” Waller said in a recent interview. “It doesn’t mean you get one, let’s be clear. It just says you’re able to request.” Which firms actually receive a skinny master account is at the Fed’s discretion, he said.
Wyoming state leaders say their crypto banks have every right to the Fed’s system.
“Wyoming has been working on safely integrating digital assets into the banking system since 2019, and it is imperative that the Federal Reserve do the right thing and ensure Wyoming’s applicants receive accounts immediately,” Senator Cynthia Lummis told American Banker this week.