Kansas City Fed rejects Custodia’s master account application

The Federal Reserve Bank of Kansas City has denied Custodia Bank’s application for a master account, according to a U.S. district court filing.

The reserve bank disclosed the rejection in a motion to dismiss filed with the U.S. District Court of Wyoming on Friday afternoon. Custodia is suing both the Kansas City Fed and the Fed Board of Governors over its long-delayed application for a master account, which grants access to the Fed’s various financial services, including its payment system.

In its filing, the Kansas City Fed and the Board of Governors argue that the ruling should render Custodia’s lawsuit moot. The bank had sought to pressure the Fed to make a decision about its two-year-old application, arguing that it had been subject to an unreasonable delay.

The Kansas City Fed’s denial of Custodia’s master account application came just hours after the Board of Governors rejected the Wyoming-based digital asset bank’s bid to become a state member bank. The designation would have made the Fed Custodia’s primary supervisor and — according to the central bank’s recently enacted application review framework — made it easier for the bank to receive a master account.

Nathan Miller, a spokesman for Custodia, said the bank plans to continue its litigation against the Fed, noting that the bank intends to challenge whether the bank has congressional authority to pick and choose which institutions can have master accounts. Custodia and others argue that any state chartered depository is entitled to master account access.

In a written statement, Miller accused the Board and the Kansas City Fed of taking “coordinate action against” the bank and said the rationale for the rejections was “misguided and wrong.”

“It will not protect American consumers, will discourage responsible innovation, and will provide even greater advantages to incumbent banks,” Miller said in a written statement. “Custodia Bank offered a safe, federally regulated, solvent alternative to the reckless speculators and grifters that the Fed has allowed to penetrate the U.S. banking system, with disastrous results for some banks. Custodia actively sought federal regulation, going above and beyond all requirements that apply to traditional banks.”

The Kansas City Fed’s court filing did not disclose a reason for the denial. The reserve bank declined to comment on the decision Friday afternoon.

For its rejection decision, the Board of Governors cited safety and soundness concerns related to Custodia’s “untested” business model, which involves providing custody services for crypto assets and calls for the eventual creation of a stablecoin. 

Custodia filed its lawsuit against the Fed in June, claiming that not only had the Kansas City Fed taken too long to review the matter, but that the Board of Governors had intervened, violating the Fed’s stated policy that regional reserve banks have sole authority over granting master accounts.

Both the Board and the Kansas City Fed have made multiple attempts to have the case against them dismissed, but the matter has survived to move to trial — a rarity for legal challenges involving the central bank.

Following a pretrial hearing earlier this month, the parties have begun the discovery process, which involves requesting and disclosing information of material importance to the suit. Disclosures were set to be made this summer, with a tentative trial date set for Nov 6.

Along with decisions from both the Kansas City Fed and Board of Governors, the Fed also issued a policy statement on Friday, requiring federally supervised state banks without federal deposit insurance to be subject to the same rules around crypto activity as those that are both insured and regulated at the federal level. The move was designed to align the supervision regimes for the Fed and the Office of the Comptroller of the Currency.

The White House also announced a “roadmap” to mitigating cryptocurrency risks, in which it directs regulatory agencies to “ramp up enforcement” and issue guidance around best practices in dealing with digital assets. It also called on Congress to empower regulators to have greater oversight of the crypto space without greenlighting greater engagement with the sector by mainstream institutions.