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The Federal Reserve Board of Governors and Custodia Bank are at odds over discovery in their ongoing legal battle about access to the central bank's payment system. In a court filing last week, the Fed said rather than going through discovery - a legal process in which parties can request and must disclose information pertinent to the case - it would simply prepare an administrative record for the court to review. In response to the filing, Custodia, a Cheyenne, Wyoming-based digital bank that is suing to get access to a so-called master account with the Federal Reserve Bank of Kansas City, accused the Fed of attempting to game the legal system as part of its "pattern of obfuscation and delay... Further delay and gamesmanship only exacerbate the harm that is the basis for Custodia's claim," the firm's filing states. "As an agency of the federal government, the Board must play by the same rules as other litigants." Custodia is urging the court to compel the Fed board to comply with its discovery requests in short order or issue a default judgment in Custodia' favor. Custodia brought suit against the Fed Board of Governors and the Kansas City Fed in June, accusing them of slow-walking the depository's application for a so-called master account, which would grant it access to the Fed's various services, including the settlement of payments. Custodia submitted its application in October 2020.

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 Kansas City Fed 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. 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. https://twitter.com/profjuliehill/status/1619116401163382784

"A judge on Friday denied the Federal Reserve's August motion to dismiss the master account lawsuit brought by Custodia Bank, ruling the bank had sufficiently argued that the Kansas City Fed engaged in "unreasonable delay" in processing its master account application. Custodia, which was granted a special-purpose depository institution (SPDI) license in Wyoming in 2020, has been waiting two years for the Fed to approve its application for a master account, a delay the bank has called "unlawful." Citing an argument the bank put forth, Judge Scott Skavdahl of the U.S. District Court for the District of Wyoming ruled Custodia had plausibly argued unreasonable delay because the Fed's standard form agreement states "[p]rocessing may take 5-7 business days.""

The Fed Board of Governors released its final order on Wyoming-based Custodia Bank's application to become a member of the Federal Reserve system, expressing strong doubts about Custodia's management team, financial condition and business model in rejecting the application. Custodia responded with a framing of the context for the Fed's implicit new policy stance and and what other banks might learn from them. The Fed outlined at least five new policies in the Custodia order, including the casting doubt on whether any issuer of a stablecoin on an open, public and/or decentralized network can comply with anti-money laundering/combating financing of terror laws. Also, the Fed de facto established a new requirement that state banks be FDIC-insured in order to become Fed member banks because, in its words, FDIC insurance is "a critical tool in preventing bank runs."

The Federal Reserve Board has denied Custodia Bank's application to become a member of the Federal Reserve System, saying that it is inconsistent with the required factors under the law. Custodia is a Wyoming-chartered special purpose depository institution, which does not have federal deposit insurance. According to the denial, Custodia is proposing to engage in "novel and untested crypto activities that include issuing a crypto asset on open, public and/or decentralized networks that... present significant safety and soundness risks... The Board has previously made clear that such crypto activities are highly likely to be inconsistent with safe and sound banking practices, and it found that Custodia's risk management framework was insufficient to address [these] concerns [and] its ability to mitigate money laundering and terrorism financing risks.

US Law firm Davis Wright Tremaine LLP (DWT) published a report on Wyoming's Custodia Bank's successful complaint regarding the Federal Reserve's tardy response to the bank's application for a Master Account. DWT represented Custodia in the legal action, and they believe We believe this is the first case in which claims seeking to compel the grant of a master account have proceeded beyond the motion to dismiss stage. I reported on this some weeks ago but with little of the detail included here. I am quite surprised at the crypto press hasn't picked up on this important news, but I guess they prefer their stories spoon fed to them.

"Judge Scott Skavdahl of the U.S. District Court for the District of Wyoming said he likely would not dismiss the lawsuit Custodia Bank filed against the [Fed] earlier this year. Following oral arguments from all parties, Skavdahl declined to issue a ruling from the bench on the Fed's motion to dismiss the lawsuit. He noted that the scope of the suit might be adjusted but the matter would likely survive "in some form." Custodia, a Wyoming-chartered special-purpose depository, sued the Fed in June, hoping to compel it to make a decision on the company's roughly two-year-old application for a master account with the Kansas City Fed."

Wyoming-based Special Purpose Depository Institution Custodia Bank filed an amended complaint against the Federal Reserve, weeks after the Fed rejected the bank's effort to become a member of the Federal Reserve System and secure a master account. In its filing, Custodia argues that the Federal Reserve and Federal Reserve Bank of Kansas City have no authority to block it from the central bank's payment system. The Fed maintains that its 12 regional banks have sole discretion over granting master accounts to banks in their respective districts. Because the reserve banks are technically private institutions composed of member banks, they are not subject to provisions of the Administrative Procedure Act. Custodia's lawsuit challenges this distinction and questions whether the Fed intervened to stymie its master account application.

Caitlin Long had high hopes of bringing crypto into the mainstream financial system. Long's Custodia Bank in Cheyenne, Wyoming, a state-charted special purpose depository institution, or SPDI, was spearheading those dreams for all of cryptocurrency. Those dreams crashed into the concrete bollard of reality on January 27, 2023, when the Federal Reserve Board denied Custodia's application to be a Federal Reserve member bank, and the Federal Reserve Bank of Kansas City denied its application for a master account. The Board's full 86-page order, made public on March 25, details how Custodia failed to address "the heightened risks associated with crypto activities, including its ability to mitigate money laundering and terrorism financing risks." (The Kansas City Fed's denial letter was not made public.)

Custodia Bank will appeal the US District Court ruling in Wyoming that supported the decision of the Federal Reserve Bank of Kansas City to deny Custodia a master account. This move is part of Custodia's continued efforts to secure direct access to the Kansas City Fed's payment systems, which it deems crucial for the growth of its operations. The appeal marks the latest development in a prolonged legal battle that goes back to 2022. The On March 29, 2024 ruling highlighted the Fed's discretionary power in granting or denying master accounts, the judge stating that "Federal laws do not require the Federal Reserve to give every eligible institution a master account."

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, 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 is now "reviewing the Court's decision and all of [its] options, including appeal".

The Federal Reserve Board (FRB), in a unanimous decision, has again rejected Wyoming-chartered Custodia Bank's bid to become a member of the Federal Reserve System, after previously denying the application in January 2023. The initial rejection said Custodia's business model "presented significant safety and soundness risks," and claimed Custodia did not have a sufficient risk management framework in place." https://www.federalreserve.gov/newsevents/pressreleases/orders20230223a.htm

Seven U.S. Republican lawmakers have thrown their weight behind Custodia Bank in its ongoing legal battle to get a master account at the Federal Reserve.

Crypto bank Custodia is suing the Federal Reserve Board and the Kansas City Fed charging they have "unlawfully" delayed for 19 months acting on its application for a master account with the Federal. The Wyoming-chartered  "special purpose depository institution'' says the master account would reduce its costs and is "vital" to its core mission of providing a bridge between digital assets and the U.S. dollar system. According to the suit, the Fed has a legal obligation to act within a year and the application was made in October 2020.

"Custodia plans to issue the token on Blockstream's Liquid network and possibly also on Ethereum. These are public decentralized networks. Custodia would have no control over the ownership and distribution of such tokens. It would be as if it had issued its own banknotes. The joint regulator statement cited above says that issuing tokens on such networks is "highly likely to be inconsistent with safe and sound banking practices." While regulators perceive crypto as a vehicle for money laundering, terrorist financing and ransomware, and the headlines are dominated by crypto-related frauds, scams and rug pulls, regulated banks are not going to be allowed to issue stablecoins on public networks."

Wyoming-based Avanti Financial Group has changed its name to Custodia Bank, and announced plans to launch in Q2 with U.S. dollar deposit accounts for business customers, initially providing ACH and Fedwire services. Its post-launch roadmap includes digital asset custody, Avit™ (a payment instrument akin to a digital cashier's check) and prime services, facilitated by customer-facing APIs to enable the programmability of payments by customers.

The Fed's Board of Governors released its final order on crypto-centric, Wyoming-based Custodia Bank's application to become a member of the Federal Reserve system. The central bank raised strong doubts about Custodia's management team, financial condition and business model in rejecting the application.

However, the Federal Reserve has been blocking non-lending banks from accessing Fed payment systems, though, which means the "safe banks" either cannot operate at all or cannot provide the very "safe banking" services that consumers want. Custodia Bank is one such bank, and its CEO Caitlin Long makes an interesting point about the soon-to-be-launched FedNow fast payments platform: "In the thick of today's social media-accelerated, online-banking accelerated banking crisis, the "borrow short-term and lend long-term" model is less stable than it has ever been. And it's about to become even less stable - because the speed of money movement in the U.S. is scheduled to accelerate this July, when the new FedNow payment system comes online. Intended to replace Fedwire, FedNow will allow depositors to access their bank deposits 24/7/365. Just imagine how much worse today's banking crisis would be if panicked depositors could move their funds during the news-filled weekends. [

"The crisis that has engulfed crypto in the last year is a crisis of fractional reserve banking. Silvergate Bank and Signature Bank NY were fractional reserve banks. So too were Celsius Network, Voyager, BlockFi, Babel Finance and FTX. And still standing are the crypto fractional reserve banks Coinbase, Gemini, Binance, Nexo, MakerDAO, Tether, Circle, and, I would argue, every one of the DeFi staking pools. All of these are doing some variety of fractional reserve banking. Custodia Bank and Kraken Finance claim to be full-reserve banks - but 100% reserve backing for deposits is both hard to prove and not a guarantee of safety. What do I mean by "fractional reserve banking"? My definition might surprise you. For me, fractional reserve banking simply means that the composition of a bank's assets is less liquid than that of its liabilities."

"This Article examines whether the Federal Reserve's payments discretion is as great as it now claims-a question that has been raised in three recent cases, but never answered. It concludes the Fed has overstepped. The language and structure of the Federal Reserve Act require that the Federal Reserve provide payment services to all eligible banks. In support of this statutory interpretation, the Article excavates long forgotten legislative history and more than a century of sometimes hidden Federal Reserve payments practices. It shows that although the Federal Reserve has some discretion over the payments it processes and terms under which it offers it payments services, the Fed's discretion is not so broad as to allow it to reject access requests from legally eligible banks. If the Fed wants to exclude banks, it should ask Congress to change the law. "