Crypto Bank Custodia Sues Federal Reserve Over ‘Black-Box’ Master Account Decision

Custodia Bank, a Wyoming-based digital asset bank, has taken legal action against the Federal Reserve Bank of Kansas City and the Board of the Federal Reserve to force the institutions to issue a decision on the bank’s application to access the Fed’s Master Accounts.

The bank argued that the institutions have “unlawfully” delayed for 19 months the decision to grant it access to the master accounts with the Federal Reserve. If Custodia could get such an account, which the bank says is “vital to the bank’s ability to operate effectively,” it could directly access the Federal Reserve payment system, rather than going through an intermediary bank.

“As required by Federal Reserve System regulations, Custodia submitted its application to the Federal Reserve Bank responsible for its district, the Kansas City Fed. Despite regular meetings and thousands of pages of responses to various inquiries, more than 19 months have passed without a decision on Custodia’s master account application, and no assurance has been provided that a decision is forthcoming at all, let alone in the near future,” Custodia said in the legal filing.

Custodia pointed to federal law mandating that state-chartered deposit-taking institutions like Custodia must be allowed access to the Federal Reserve System through master accounts. While the Federal Reservehas yet to make a decision, in the bank’s opinion, the “Fed’s action in withholding a decision on Custodia’s master account application for more than 19 months is patently unlawful.” According to the evidence provided by the bank, an application of this nature should be resolved within 5 to 7 days. The law also obliges agencies to resolve applications within the 1-year period they are received.

If getting a decision from the Kansas City Fed and the Board of the Federal Reserve is the bank’s main request, the second request is to get more information about how the institutions will make that decision, as Custodia claims that the “defendants’ method for reviewing master account applications largely remains a black box.” The company cites numerous meetings and communications with Kansas City Fed and the Board and “it remains a mystery” how they allocate decision-making authority for reviewing and granting master accounts access.

Timing for a Decision

Custodia’s lawsuit may be a double-edged sword. The bank is requesting that the court order the Federal Reserve to decide on its application within 30 days of the court’s order. But a lawsuit could be litigated for months or years, which would probably delay the final decision on the application. To avoid this situation, Custodia is requesting the court to order a speedy hearing on Custodia’s request for a declaratory judgment. But if the Court doesn’t agree with this request, the litigation could be prolonged more than the bank would like.

Fed’s Evaluative Guidelines

At the center of the finger pointing between Kansas City Fed and the Board of the Federal Reserve for not taking a decision, the bank argued, are the guidelines to evaluate requests for accounts and services at Federal Reserve Bank, which were published last May and updated in April. While the guidelines established a “tiered-review framework” that should fast-track some applications and provide guidance to assess the applications, it doesn’t impose any timeframe on the Federal Reserve to make a decision.

Kraken, Custodia and Routing Numbers

Custodia defines itself as a bank formed to be a compliant bridge between digitals assets and the U.S. dollar payment system. According to the legal filing, Custodia plans to hold all customer deposits of U.S. dollars in cash in a Federal Reserve master account, and it plans to hold no digital assets for its own account. This means that Custodia will not be exposed to the volatility of digital asset prices because it will hold all digital assets in bailment on behalf of a customer in its trust department, the bank said.

Custodia and digital asset bank Kraken Bank both have Wyoming special purpose depository institution (SPDI) charters, which allow them to offer comprehensive deposit taking, custody and fiduciary services for digital assets. Both banks received routing numbers earlier this year, and they could be the first banks of their type to get access to the Fed’s master accounts.

While a routing number does not guarantee the Fed’s approval, it is an important step — and one that could give digital asset firms more secure access to mainstream banking.

Read more: Fed Ends Consultation With Kraken, Custodia Nearing Access to Payment Rails