Bitcoin Bank Custodia Sues Fed, Demands Master Account

The Custodia’s complaint alleges “illegal” delays in the bank’s approval procedure for a master account with the Federal Reserve, which would reduce costs and risks. Custodia, a Bitcoin bank, is suing the Federal Reserve for delaying the approval procedure for a “Master Account.”

Custodia Bank has filed a lawsuit against the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City for the “unlawful delay” in processing its application for a master account.

Avanti, the digital-asset bank, was given a special-purpose depository institution (SPDI) license in the state of Wyoming in 2020. 

According to the lawsuit, the bank requested a master account with the Fed in October 2020 and has been waiting 19 months for its application to be accepted, despite the Fed’s standard form agreement stating that “[p]rocessing may take 5-7 business days.”

A master account would enable Custodia Bank to use the Federal Reserve’s banking system to clear US dollar transactions without the need for an intermediate bank and is critical to the bank’s capacity to function effectively and efficiently, according to the lawsuit.

Custodia argues that the bank is suffering significant and continuous harm as a result of the delay in processing its master account application.

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“The immediate injury is that the delay has forced Custodia to postpone its solo entry into the financial services market in favor of a decidedly second-best and far more expensive alternative: launching with a correspondent bank — which has a master account — while Custodia awaits a decision on its long-pending application,” the bank claimed in a 44-page lawsuit.

Using a correspondent bank, according to Custodia, is more expensive and involves counterparty credit risk and settlement risk.

Working through a correspondent bank also removes the competitive advantage of obtaining an SPDI charter, “thus favoring existing and established rivals and disrespecting Wyoming’s sovereignty as a state with unambiguous legislative power to charter depository institutions,” according to the complaint.

Custodia was created in 2020 by Caitlin Long, a former managing director at Morgan Stanley, under the name Avanti Financial Group. The bank was one of the first to receive an SPDI charter under Wyoming’s crypto-friendly law, which was approved in 2019.

“Through this litigation, Custodia intends to ensure that its Federal Reserve master account application receives the fair dealing and due process granted to it by both federal statute and the United States Constitution,” said Nathan Miller, a Custodia Bank spokeswoman, in an email to Banking Dive. “Custodia has met all applicable rules and gone above and above by applying to become a Fed member bank.”

Custodia stated that the Kansas City Fed got his business plan in May 2020, some months before the bank submitted its master account application. According to the complaint, the reserve bank verified that Custodia’s master account application is complete.

Custodia stated that a representative of the Kansas City Fed advised it in early 2021 that there were “no showstoppers” with the bank’s application.

The bank stated that the Kansas City Fed’s consideration and approaching acceptance of its application were halted when the Federal Reserve gained control of the decision-making process in spring 2021.

“As a result, Defendants have failed to adequately evaluate, much alone determine, Custodia’s long-pending application,” the bank complained in its lawsuit.

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According to the lawsuit, the continuous delay prohibits newcomers from introducing innovation and competition in the financial services sector and “benefits the incumbent financial institutions whose interests are represented on the Board of Directors of the Kansas City Fed.”

According to CoinTelegraph, if Custodia obtains a master account with the Fed, it will be the first digital asset bank in the country to do so.

In a letter, six banking trade groups urged the Fed to offer greater clarification on how it grants master accounts to unconventional businesses.