Custodia’s Legal Battle with the Federal Reserve
Custodia, a cryptocurrency bank chartered in Wyoming, is intensifying its legal struggle against the Federal Reserve concerning the denial of its master account application. On December 15, Custodia petitioned the full Tenth Circuit Court of Appeals to revisit a recent decision by a panel that they believe has misinterpreted federal law and raised important constitutional issues related to the Fed’s powers. This latest request calls for an en banc review, meaning that all active circuit judges will reconsider whether regional Federal Reserve Banks have the absolute discretion to deny access to master accounts for legally recognized institutions.
Core Arguments and Constitutional Concerns
Central to Custodia’s argument is the assertion that the recent 2-1 ruling by the appellate panel contradicts the Monetary Control Act, which states that payment services “shall be available” to nonmember depository institutions. This alleged contradiction suggests that the Federal Reserve could be exercising an unconstitutional veto against state banking charters. This particular case poses a significant threat to the balance of power between federal and state regulation, notably undermining Wyoming’s decision to license Custodia as a Special Purpose Depository Institution in 2020.
Without access to a master account, Custodia is unable to fully utilize the core payment services offered by the Federal Reserve, such as wire transfers and automated clearinghouse systems, which effectively undermines the validity of its state-issued charter. Custodia highlights that when the Federal Reserve denies a master account to a state-chartered bank, it effectively nullifies the approval granted by state regulators, thereby jeopardizing state-level initiatives designed to stimulate blockchain innovation with tight safety measures, including a mandate for 100% reserve backing and a prohibition on lending.
Constitutional Questions and Judicial Divide
Furthermore, Custodia’s legal team raises significant constitutional questions, suggesting that if Reserve Bank presidents possess uncontestable discretion over master accounts, they may assume roles akin to federal officials without a proper constitutional appointment process. The manner in which these Reserve Bank presidents are chosen—by private bank directors and subsequently approved by the Board of Governors—has been called into question with respect to the Appointments Clause, especially since they hold substantial power as affirmed by the majority opinion on discretionary authority.
The legal disputes are underscored by a growing divide among judges within the Tenth Circuit regarding the interpretation of relevant statutes. A dissenting opinion by Judge Timothy Tymkovich aligns with a previous ruling in 2017 related to a different financial institution, highlighting a split among judges on whether the Monetary Control Act requires access to master accounts.
Background and Broader Implications
This petition follows Custodia’s application denial by the Kansas City Federal Reserve in January 2023 after a lengthy review period, where the bank was informed of minimal issues initially but subsequently faced rejections citing concerns over its activities in crypto-assets.
Notably, Federal Reserve Governor Christopher Waller later acknowledged that the institution has sufficient tools to manage potential risks without resorting to outright denials of master accounts. His comments suggest that the Fed could adjust account structures to cater to various bank risk profiles, further complicating the argument for blanket denials of access.
Custodia’s struggle is part of a broader issue wherein federal regulators have begun to address systematic debanking practices impacting cryptocurrency companies. The Office of the Comptroller of the Currency released a report in December indicating that major national banks have imposed inappropriate restrictions on legal businesses, including those in the digital asset sector, between 2020 and 2023. Instances of restrictive policies led to public allegations of discrimination against these firms, compounded by anecdotal evidence from industry leaders whose accounts have faced sudden closure under nebulous accusations of concerning activity. The political pressure has increased in light of recent executive moves aimed at preventing unfair debanking practices based on customers’ engagement with cryptocurrencies.
