Crypto bank Custodia sues the Fed for more than 19 months of delay in approving the account

Wyoming-based digital asset bank Custodia is suing the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City, alleging “unlawful delay” in processing an application for its main account.

Custodia, formerly known as Avanti, was one of the first Special Purpose Depository Institutions (SPDIs), also known as “blockchain banks,” created under Wyoming’s regulatory framework.

The bank was founded by Caitlin Long, an early bitcoin (BTC) advocate who established the institution in 2020 to provide accounts to crypto companies and serve as their gateway to the US dollar payment system.

Custodia submitted an application for a Federal Reserve Main Account 19 months ago in October 2020. The account would allow Custodia to access Federal Reserve payment systems without using a third-party bank.

Nathan Miller, spokesperson for Custodia Bank, told Cointelegraph:

“Through this lawsuit, Custodia seeks to ensure that its Federal Reserve Main Account Application receives the fair use and due process guaranteed to it by federal law and the U.S. Constitution. Custodia has satisfied all the rules that apply to it and went above and beyond by applying to become a Fed member bank.

The lawsuit claims the Federal Reserve violated a United States code that provides a one-year time limit for processing the application and says it even states on the main account application that a decision takes five to seven working days.

The Fed’s Kansas City bank was ready to approve the account before the Federal Reserve Board asserted control of the process in the spring of 2021, which “derailed” the request, according to Custodia.

Custodia says the ‘bureaucratic black box process’ meant it had exhausted ‘all options except litigation’ and was seeking to force the Federal Reserve and its Kansas City bank to approve its main account within 30 days .

Custodia plans to provide final settlement of US dollar payments in digital asset transactions, as well as provide digital asset custodial services. A key part of its service is to settle its customers’ payments directly with the Fed, which it says will reduce costs, counterparty credit risk and settlement delays.

The delay postponed Custodia’s full market entry and forced the bank to partner with another bank that already has a main account. He says it’s a “band-aid solution” that’s “second best and much more expensive.”

Related: Fed Governor Explains Who Needs Crypto Regulation and Why Demand Is Growing

If Custodia wins the lawsuit or obtains a main account from the Fed, it will be the first digital asset bank in the country to obtain one.

In December 2021, Republican Wyoming Senator Cynthia Lummis claimed the Fed was “breaking the law” with its unfair treatment of SPDIs as Custodia by delaying requests to receive major accounts.

SPDIs were created out of a Wyoming cryptocurrency custody regulatory framework introduced in late 2019 to serve businesses unable to secure Federal Deposit Insurance Corporation (FDIC) banking services due to their relationships with the cryptocurrency.