Custodia Bank Denied Federal Reserve Master Account by U.S. District Court

The United States district court has denied Custodia Bank's request for a Federal Reserve master account and has dismissed the digital asset bank's petition for a declaratory judgment. Nonetheless, Custodia asserts its determination to pursue all available options.

In a filing dated March 29 and presented to the United States District Court of Wyoming, Judge Scott Skavdahl rejected Custodia’s attempt to obtain a Federal Reserve master account. This account, commonly known as "a bank account for banks," facilitates financial institutions' access to the Federal Reserve’s payment systems.

Custodia argued that without a master account, it would be disadvantaged in providing custodial services for crypto-assets compared to other banking institutions.

“Without a master account, if Custodia is able to operate at all, it is a second-class citizen, relegated to dependency on and fealty to an intermediary bank,” it contended.

Furthermore, Skavdahl ruled that Custodia is not entitled to overturn the decision of the Federal Reserve Bank of Kansas City:

“Custodia is not entitled to its requested writ of mandamus compelling FRBKC to issue its master account, and summary judgment on Claim II must be granted in FRBKC’s favor.”

Custodia filed a lawsuit against the Fed in June 2022, alleging that the Federal Reserve Bank of Kansas City had delayed its decision on the master account application. Master accounts enable direct access to the Federal Reserve for banks and depository institutions, bypassing the need for intermediary banks. It amended its complaint against the Fed in February after the central bank rejected its application.

In its revised complaint, Custodia argued that the Fed's board had unlawfully instructed the Kansas City Fed to reject its application and that the Fed lacked the discretion to refuse applications from nonmember depository institutions.

In his recent ruling, Judge Skavdahl stated that the law does not mandate the Fed to grant master account access to applicants and that the evidence suggested the decision was made by the Kansas City Fed rather than the board of governors. Custodia submitted an application for a Federal Reserve master account in October 2020. If granted, the application would provide the bank access to the Fedwire network, which processed over 193 million transactions last year.

In January 2023, the Fed turned down Custodia's membership application, citing its involvement in the crypto space as "inconsistent with the required factors under the law."

Custodia was among Wyoming’s initial Special Purpose Depository Institutions (SPDIs), also referred to as “blockchain banks." SPDIs were established to assist businesses unable to obtain banking services from the Federal Deposit Insurance Corporation due to their crypto-related activities.