Custodia Continues Fed Fight, Appeals Master Account Denial

Key Takeaway

• Custodia Bank appeals a court decision upholding the Federal Reserve's rejection of its master account application, continuing its legal battle.
• The ruling highlighted concerns over a potential "race to the bottom" in state chartering laws if Fed banks lacked discretion to deny applications.
• Custodia challenges the Fed's legal fee collection efforts, citing the ongoing appeal and concerns about discouraging future litigation against government entities.

Custodia Appeals Federal Ruling

Custodia, a Wyoming-based crypto bank hopeful, has officially filed a notice of appeal against a recent court decision that upheld the Federal Reserve's refusal to grant it a master account. This move comes after a federal judge ruled that the Kansas City Fed acted within its discretion when it denied Custodia's application for membership. The court found that Custodia failed to provide adequate evidence to support its claims that the Fed's Board of Governors had improperly influenced the Kansas City branch's decision. A master account with the Federal Reserve would have allowed Custodia direct access to the Fed's services, bypassing the need for intermediary banks.

The Court's Reasoning

The ruling, delivered by Judge Scott Skavdahl, highlighted concerns over the potential for a "race to the bottom" in state chartering laws if Federal Reserve Banks lacked the discretion to deny master account applications. Judge Skavdahl suggested that without this discretion, states might compete to attract business by lowering regulatory standards, thereby enabling minimally regulated institutions to gain easy access to central bank services and balances. This perspective underscores the delicate balance between fostering innovation in the financial sector and ensuring the stability and integrity of the U.S. financial system.

Custodia's Ongoing Battle

Custodia's struggle for a master account has been lengthy, beginning years ago when it first sued the Fed over delays in deciding on its application. The company, led by Caitlin Long, a key figure in drafting Wyoming's special purpose depository institution law, refiled its lawsuit after the Fed formally rejected its application. In response to the recent court ruling, a Custodia spokesperson stated that the company was reviewing the decision. Furthermore, Custodia has contested the Fed's request for legal fees, arguing that the case remains active due to the appeal and expressing concern that awarding fees could deter future legal challenges against government or quasi-government entities by companies.

Management Quotes

• Caitlin Long, CEO of Custodia:

  "Unless Federal Reserve Banks possess discretion to deny or reject a master account application, state chartering laws would be the only layer of insulation for the U.S. financial system... And in that scenario, one can readily foresee a 'race to the bottom' among states and politicians to attract business by reducing state chartering burdens through lax legislation, allowing minimally regulated institutions to gain ready access to the central bank's balances and Federal Reserve services."