Custodia's Suit Against Fed Over Denial of Master Account Can Proceed, Court Rules

Custodia's challenge of the Federal Reserve Bank of Kansas City's decision to deny the crypto-friendly bank access to the Fed banking services can continue, a U.S. district court ruled Thursday, rejecting a Fed motion to dismiss the case.

The U.S. District Court of Wyoming, however, did reject Custodia's request that the Fed be compelled to grant it a so-called master account and membership with the Fed. Instead, Custodia must continue its claims via normal channels.

"Custodia Bank will get its day in court," Patrick Toomey, retired U.S. senator from Pennsylvania, tweeted about the decision on Friday afternoon. Toomey, along with the state of Wyoming, filed amicus briefs to support Custodia's suit.

Even though the court declined to grant Wyoming-based Custodia's request, it said that it was only rejecting the request because there was another avenue Custodia could pursue,

"Custodia has stated a plausible claim for relief ... against FRBKC [Federal Reserve Bank of Kansas]. However, relief under the Mandamus Act is not available to Custodia against the Board of Directors because the APA (Administrative Procedure Act) provides an adequate remedy," the ruling said.

The district court also said that if the Kansas City Fed had been alone in denying Custodia its master license, Custodia's claim would fail. However, the court said Custodia's claim that the Fed Board of Governors had weighed in on the decision was plausible.

"The alleged occurrence of certain events, and the timing of those events, plausibly suggest the Board of Governors had at least some hand in controlling the outcome of Custodia's master account application," the court wrote in its ruling.

Read more: Federal Reserve Says Custodia’s Plans Would Endanger Itself and the Crypto Industry

In October 2020, Custodia applied to the Kansas City Fed for a master account. Without such an account, banks can't offer the same services as institutions with such accounts. Then in August the next year, Custodia applied to the Fed Board of Governors for membership, which would subject the bank to the Fed's oversight and regulations.

Eighteen months later, in January 2023, Custodia was rejected in every single category the Fed assesses, partly because of its crypto friendliness and part because it was a state-chartered bank, not a nationally chartered one.

In its rejection, the central bank claimed Custodia's lack of federal deposit insurance and Custodia’s dependence on a vibrant crypto market made it a danger to itself and its customers.

UDPATE (June 12, 2023, 16:15 UTC): Clarifies Fed's issue with Custodia's lack of federal deposit insurance.