Custodia Bank, a Wyoming-based digital asset bank, has filed a lawsuit against the Federal Reserve Bank of Kansas City and the Federal Reserve Board to force the institutions to issue a ruling on the bank’s request. access the main accounts of the Fed.
The bank argued that the institutions “unlawfully” delayed a decision to grant it access to key accounts with the Federal Reserve for 19 months. If Custodia could obtain such an account, which the bank says is “vital to the bank’s ability to operate effectively,” it could directly access the Federal Reserve’s payment system, rather than going through an intermediary bank.
“As required by Federal Reserve System regulations, Custodia submitted its request to the Federal Reserve Bank responsible for its district, the Kansas City Fed. Despite regular meetings and thousands of pages of responses to various inquiries, more 19 months have passed without a decision on Custodia’s main account application, and no assurances have been provided that a decision will be made, let alone in the near future,” Custodia said in the legal filing.
Custodia pointed to federal law requiring that state-chartered depository institutions such as Custodia be permitted access to the Federal Reserve System through master accounts. While the Federal Reserve has yet to make a decision, in the bank’s view, “the Fed’s action to suspend a decision on Custodia’s main account application for more than 19 months is blatantly illegal. “. According to the evidence provided by the bank, a request of this nature should be resolved within 5-7 days. The law also requires agencies to resolve requests within the one-year period in which they are received.
If obtaining a decision from the Kansas City Fed and the Federal Reserve Board is the bank’s main request, the second request is to obtain more information on how the institutions will make this decision, as Custodia asserts that the “method of reviewing accused master account applications remains largely a black box. The company cites numerous meetings and communications with the Kansas City Fed and the board and “it remains a mystery” how they allocate decision-making authority to review and grant access to master accounts.
Moment for a decision
Custodia’s lawsuit can be a double-edged sword. The bank is asking the court to order the Federal Reserve to rule on its request within 30 days of the court order. But a lawsuit could be argued for months or years, likely delaying a final decision on the claim. To avoid this situation, Custodia is asking the court to order a speedy hearing on Custodia’s request for declaratory judgment. But if the Court does not accept this request, the litigation could drag on longer than the bank would like.
Fed Assessment Guidelines
In the center of the finger pointing betweennKansas City Fed and the Federal Reserve Board for failing to make a decision, the bank argued, are the guidelines for evaluating applications for accounts and services at the Federal Reserve Bank, which were issued last May and updates in April. While the guidelines established a “tiered review framework” that should expedite certain requests and provide guidance for assessing requests, they impose no time limit on the Federal Reserve to make a decision.
Kraken, Custodia and Routing numbers
Custodia defines itself as a bank formed to be a compliant bridge between digital assets and the US dollar payment system. According to the legal filing, Custodia plans to hold all US dollar client deposits in cash in a main Federal Reserve account, and it does not plan to hold any digital assets for its own account. This means that Custodia will not be exposed to digital asset price volatility as it will hold all digital assets in custody on behalf of a client in its fiduciary department, the bank said.
Custodian and digital asset bank Kraken Bank in one have Wyoming Special Purpose Depository Institution (SPDI) charters, which allow them to offer comprehensive custodial, custodial, and trustee services for digital assets. Both banks received routing numbers earlier this year, and they could be the first banks of their kind to have access to Fed master accounts.
While a routing number won’t guarantee Fed approval, it’s an important step — and one that could give digital asset firms more secure access to traditional banking services.
Read more: Fed ends consultation with Kraken as depositories approach access to payment rails