Custodia Bank’s Federal Reserve Master Account Denied

Custodia Bank suffered a legal setback as it lost its bid for a Federal Reserve master account following a court ruling against it.

The decision delivers another blow to the crypto market, with industry giants like Coinbase and Ripple facing significant hurdles in their respective legal cases with US authorities.

Why Custodia Lost Its Case

Wyoming-based Custodia filed a lawsuit against the Federal Reserve in June 2022, citing significant delays in processing its application for a master account. After the Federal Reserve rejected the application, Custodua revised its claims contending the undue influence from the Federal Reserve Board led the Kansas City Fed. Additionally, the firm argued that the central bank lacked the authority to dismiss such applications.

However, Wyoming district judge Scott Skavdahl disagreed with Custodia’s assertions. Skavdahl affirmed the Federal Reserve’s discretion in granting or denying the master account applications.

“If Custodia’s position was correct, it would effectively mean that every depository institution chartered under the laws of a state, regardless of how soundly crafted, is entitled to a master account allowing it direct access to the federal financial system,” the judge stated.

Read more: Crypto Regulation: What Are the Benefits and Drawbacks?

This effectively dismisses Custodia’s attempt to compel the central bank to approve its master account application. Furthermore, Skavdahl said Custodia failed to prove that the Federal Reserve violated the Administrative Procedure Act (APA) when it denied it the master account. As a result, the judge dismissed this claim without prejudice, citing a “lack of jurisdiction.”

Despite growing institutional adoption, this setback adds to the crypto industry’s challenges. Several stakeholders described the judgment as “a win for the forces behind Operation Chokepoint 2.0.” Meanwhile, Custodia said it reviewed the ruling and hinted that it could appeal the judgment.

“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,” a spokesperson for the bank reportedly said.

Similarly, US Senator Cynthia Lummis voiced her disagreement with the ruling. Lummis asserted that the judgment contradicts established laws passed by the US Congress. As such, the lawmaker urged the Federal Reserve to adhere to the law by granting Special Purpose Depository Institutions (SPDIs) in Wyoming access to master accounts.

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