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US court shoots down Custodia Bank bid for Fed master account

court-custodia-bank-federal-reserve-master-account
Edited by
News
US court shoots down Custodia Bank bid for Fed master account

The U.S. District Court for the District of Wyoming dismissed Custodia Bank’s plea for a Federal Reserve master account. 

Custodia Bank, specializing in digital assets, has been seeking a master account from the Federal Reserve since 2020. The account, often described as “a bank account for banks,” is crucial for accessing the Fed’s payment systems.

The Wyoming-based bank had argued that without a master account, it would be at a significant disadvantage — particularly in offering custodial services for crypto-assets compared to traditional banking institutions. 

It contended that such a setback would relegate it to a “second-class citizen” status, dependent on intermediary financial institutions. It also said that this dependency undermines its operational autonomy and efficiency.

The Federal Reserve rejected the application in January 2023, citing concerns about Custodia’s involvement in the cryptocurrency sector, which it deemed inconsistent with regulatory requirements. 

Regulators grew especially bearish toward the cryptocurrency sector after 2022 saw Celsius crash; Luna and TerraUSD collapse; and FTX go bankrupt (BlockFi also went bankrupt).

Custodia then sued the Federal Reserve, alleging violations of the Administrative Procedures Act (APA), and sought a writ of mandamus compelling the Federal Reserve Bank of Kansas City (FRBKC) to grant the master account. 

The March 29 ruling, delivered by Chief Judge Scott Skavdahl, sided with the Federal Reserve, dismissing Custodia’s claim that it had not followed appropriate administrative procedures. Judge Skavdahl also stated that the FRBKC had the legal authority to deny Custodia’s application. 

https://twitter.com/EleanorTerrett/status/1773803778874933335

The ruling addressed Custodia’s claim that, as an officially chartered state bank, it was entitled to a master account under federal law. The judge countered this argument, emphasizing that granting master accounts solely based on state chartering laws could lead to regulatory loopholes and potential risks for the broader financial system.

The rejection highlights the broader challenges faced by blockchain-based financial institutions like Custodia, which is one of Wyoming’s pioneering Special Purpose Depository Institutions (SPDIs). It was established to provide banking services to crypto businesses unable to access traditional banking relationships.

This ruling comes against a backdrop of legislative efforts in Wyoming to address challenges faced by blockchain-based businesses. Earlier in March, the state passed a landmark crypto bill to bring decentralized autonomous organizations (DAOs) under existing laws.

Additionally, Wyoming enacted legislation to protect the rights of Bitcoin (BTC) and other digital asset holders by prohibiting the forced disclosure of private keys to unauthorized entities.

“Challenging the Fed’s strong-arm tactics has always been an uphill battle, but Custodia Bank remains committed to our vision of creating a safe, tech-enabled bank. We are reviewing the Court’s decision and all of our options, including appeal,” said Nathan Miller, a spokesperson for Custodia Bank, told crypto.news.