Custodia Ruling Leaves Fed with No Good Options

Source: American Banker

Custodia Bank's lawsuit against the Federal Reserve is not going away anytime soon, and the case will likely have major implications for the reach of the Fed's authority.

The Fed's effort to have the suit dismissed from the U.S. District Court of Wyoming fell flat on Friday as Chief Judge Scott Skavdahl said it was appropriate for the court to consider why the Cheyenne, Wyoming-based digital asset bank has had to wait two years for a decision on its application for a master account.

The Fed now has two options: grant Custodia an account or let the case go to trial. Both routes would establish new precedents and expectations for master accounts — and potentially other matters — according to legal and institutional experts.

Julie Hill, a University of Alabama law professor whose research focuses on Fed master accounts, said the Fed would almost certainly have to divulge information about master accounts that it keeps closely guarded.

Almost everything we know about the master account process … has come through litigation. They don't just let this information out. We know about these things, because of the Fourth Corner [Credit Union] case, because of the Custodia case and because of The [Narrow Bank] case," Hill said, referring to previous master account challenges. "Those are the reasons we know anything about what's happening in the master account realm, so I expect if you actually had a case that went to trial, you would learn all sorts of interesting stuff."

The cases involving Fourth Corner, a Denver credit union that sought to serve the state's legal cannabis industry, and The Narrow Bank in Norwalk, Connecticut, which wanted to hold all of its customers' deposits in risk-free reserves at the Fed, were both dismissed before going to trial. The Fed provided some explanation about the master account process in pre-trial court filings, but there was never a discovery process.

Custodia says it has built on the rulings from the previous proceedings by ensuring it has a state charter that is in compliance with various federal requirements related to the Bank Secrecy Act, anti-money-laundering requirements and host of other considerations. Custodia argues that the Kansas City Fed's delay in issuing a ruling is having crippling effects on its business.