Custodia Bank Loses Lawsuit Challenging Fed Rejection of Master Account Application

BY Coindesk | ECONOMIC | 03/29/24 05:58 PM EDT By Nikhilesh De

A federal judge has rejected Wyoming-based Custodia Bank's argument that it is entitled to a Federal Reserve master account and membership with the Fed.

Judge Scott Skavdahl, of District of Wyoming, denied Custodia's motion for judgement on Friday, writing that federal laws do not require the nation's central bank to give every eligible depository institution access to its master account system, nor did the provided evidence suggest that the Federal Reserve Board of Governors influence a regional branch of the Fed to deny its application for an account.

Custodia sued the Fed in June 2022, arguing that the Federal Reserve Bank of Kansas City had been taking too long to make a decision on its application for a master account. Master accounts allow banks and depository institutions to directly access the Federal Reserve, rather than require them to go through intermediary banks. It amended its complaint against the Fed last February, after the central bank rejected its application (the Fed later published a scathing report explaining its decision).

In its amended complaint, Custodia argued that the Fed's board had unlawfully directed the Kansas City Fed to reject its application, and that the Fed did not have the discretion to reject applications from nonmember depository institutions.

In his order Friday, Judge Skavdahl wrote that the law does not require the Fed to grant master account access to applicants, and that the evidence leaned toward the Kansas City Fed making the decision, rather than the board of governors.

"Thus, 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," the judge wrote. "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."

In a statement, Custodia spokesperson Nathan Miller said, ?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."

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