June 09, 2022
by Gaurav K. Talwar

On June 7, 2022, Wyoming-based Custodia Bank Inc. filed a complaint in the District of Wyoming accusing the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City of illegally delaying a decision on Custodia’s October 2020 application for access to critical payment systems offered to other banks and seeking an order directing the Federal Reserve to process Custodia’s application within 30 days or to overrule any denial of Custodia’s application. 

Custodia, formerly known as Avanti, was granted a Special Purpose Depository bank charter by the Wyoming State Banking Board in October 2020.  Custodia’s business plans include offering crypto custody, business deposit accounts, and eventually a stablecoin-like payment product.  In late October 2020, Custodia applied for a so-called “master” account with the Federal Reserve.  These master accounts allow recipients to directly access the Federal Reserve’s payment systems. 

In its complaint, Custodia argues that it is eligible for a Federal Reserve master account because of its deposit-taking plans in Wyoming.  Under federal law, master account access is dependent on a bank having or being eligible for FDIC insurance.  A state-chartered, deposit-taking bank, such as Custodia asserts it is, is eligible for FDIC insurance.

Custodia further asserts that the Federal Reserve does not have any legal discretion to essentially “pocket-veto” its master account application and must process any such applications within a year.  And “[in] short, the only thing clear about defendants’ master account review regime is that there are no clear rules, roles, or responsibilities,” and “[what] has resulted is an unaccountable Kafkaesque process that has and continues to inflict grave, irreparable harm on Custodia.”

The result of the Federal Reserve’s continued delay in processing the application, Custodia argues, is that it has had to pivot to a “decidedly second-best and far more expensive alternative” of launching with the help of a correspondent bank who already has a master account. 

Custodia’s lawsuit is the latest example of pressure on the Federal Reserve to allow access more broadly to fintech firms and other start-ups with new financial business models.  This pressure has also come from Senator Cynthia Lummis (R-Wyoming), who on June 7, 2022, along with Senator Kirsten Gillibrand (D-New York), released proposed legislation overhauling the regulatory framework for cryptocurrencies.  Of note, the Lummis-Gillibrand Responsible Financial Innovation Act includes provisions that affirm (1) “all depository institutions may access” the Federal Reserve banks’ payment, clearing, and settlement services; and (2) the Federal Reserve must approve or deny applications for master account access within one year of applying.

Attorneys at McGonigle continue to advise on developments in this space and are well-positioned to assist companies with regulatory and policy advice as well as compliance with regulations.   

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Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking.  This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.