US court shoots down Custodia Bank bid for Fed master account

In simpler terms, the US District Court in Wyoming rejected Custodia Bank’s request for a master account with the Federal Reserve.

Since 2020, Custodia Bank, known for handling digital assets, has been working to obtain a master account from the Federal Reserve. This type of account, frequently referred to as a “bank account for banks,” is essential for gaining access to the Fed’s payment infrastructure.

A Wyoming bank, with its headquarters in Wyoming, contended that not having a master account would put it at a notable disadvantage. This was especially true when it came to providing custody services for crypto-assets as opposed to the more conventional banking institutions.

The company argued that such a setback would demote it to a “subordinate role,” requiring it to go through intermediary financial institutions. This reliance, in turn, diminishes its ability to independently operate and optimize performance.

In January 2023, Custodia’s application was denied by the Federal Reserve due to their involvement in the crypto industry. The Fed believed this conflicted with existing regulations.

After the cryptocurrency market experienced significant setbacks in 2022 with the collapses of Celsius, Luna, TerraUSD, FTX, and BlockFi, regulatory bodies became increasingly cautious towards this sector.

After being sued by Custodia, the Federal Reserve was accused of breaking the rules set out in the Administrative Procedures Act (APA). In response, Custodia asked the court for an order (writ of mandamus) directing the Federal Reserve Bank of Kansas City (FRBKC) to grant them a master account.

On March 29, Chief Judge Scott Skavdahl made a decision in favor of the Federal Reserve. The Federal Reserve’s denial of Custodia’s application was upheld by the judge, who concluded that the proper administrative procedures had been followed. Furthermore, Judge Skavdahl confirmed that the Federal Reserve had the legal power to reject Custodia’s application.

🚨LATEST: The judge in the Custodia Bank vs. Federal Reserve case has mostly ruled in favor of the Federal Reserve. The judge dismissed Custodia’s request to review its Administrative Procedure Act claim and denied its petition for a judgment on its Statutory Mandamus Claim.

Here is the full decision: [link]

— Eleanor Terrett (@EleanorTerrett) March 29, 2024

A judicial decision challenged Custodia’s belief that, being an authorized state bank, it deserved a federal master account. The judge, however, cautioned against such accounts being granted solely based on state chartering laws. This approach could create regulatory gaps and pose risks to the overall financial system.

The dismissal underscores the larger issues that blockchain finance institutions such as Custodia, a leading SPDIs of Wyoming, encounter. Founded to cater to crypto firms excluded from conventional banking partnerships, it now grapples with these complexities.

Amidst ongoing legislative initiatives in Wyoming aimed at supporting blockchain businesses, this decision emerges. In early March, the state adopted a groundbreaking cryptocurrency law to regulate Decentralized Autonomous Organizations (DAOs) using current legislation.

Furthermore, Wyoming passed laws ensuring the privacy of Bitcoin (BTC) and digital asset owners by forbidding the compulsory revelation of their private keys to unwarranted parties.

“Despite the difficult path of opposing the Fed’s forceful methods, Custodia Bank persists in pursuing our goal to establish a secure, tech-advanced banking institution. We are currently assessing the Court’s ruling and exploring potential responses, such as filing an appeal,” Nathan Miller from Custodia Bank shared with crypto.news.

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2024-03-30 18:04