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Crypto Policy Brief - Week of 4.5.24

Custodia v. The Fed

Good morning and happy April. With Congress wrapping up Easter recess this week, we turn to the courts where a federal judge dealt a blow to a Bitcoin-friendly bank.

Top Points

  • A federal district judge in Wyoming ruled that Custodia is not entitled to a master account at the Federal Reserve.

  • The Senate Banking Committee will host a hearing focused on illicit finance concerns next Tuesday with Treasury Undersecretary Wally Adeyemo.

    • Adeyemo sent Chairman Sherrod Brown a series of legislative proposals in November that would expand Treasury's authority to combat the illicit use of digital assets.

Judge Sides with Fed in Custodia Bank Case

TLDR: On Friday, March 29, Judge Skavadahl ruled that the Federal Reserve Act leaves Federal Reserve Banks discretion to approve or deny applications for master accounts. The Court will not compel the Federal Reserve Bank of Kansas City or the Federal Reserve Board to issue Custodia a master account.


Custodia Bank is a Wyoming-chartered special purpose depository institution specializing in payment services and digital asset custody.

In October 2020, Custodia applied to the Federal Reserve Bank of Kansas City ("Kansas City Fed") for a master account.

In January 2023, the Kansas City Fed denied Custodia's application for a master account.

  • Note: The denial didn't come until 27 months after Custodia first applied, even though the master account application itself says processing "may take 5-7 business days." See June MTD Ruling at 4.

Master Account Significance

A master account would allow Custodia to access Federal Reserve System services such as deposit and withdrawal services, wire transfer services, automated clearinghouse services, settlement services, and more. Order at 3-4.

According to Custodia:

"Without such an account Custodia cannot directly access the Federal Reserve and cannot offer the same custodial services for crypto-assets that incumbent banks like BNY Mellon presently provide. Without a master account, if Custodia is able to operate at all, it is a second-class citizen, relegated to dependency on and fealty to an intermediary bank." Amended Complaint at 2-3

The Order

Custodia’s legal challenge focused on two claims, both seeking a court order that would allow it access to a master account:

  • (1) A claim the Board violated the APA in denying its application

  • (2) A claim seeking a Writ of Mandamus directing the Kansas City Fed to grant its application.

Because there was no dispute over material facts (e.g., that Custodia was eligible for a master account), the court ruled on the parties' motions for judgement as a matter of law on each claim.

The Claims

(1) APA Claim

The Court dismissed Custodia’s APA claim against the Federal Reserve Board because it found Custodia failed to challenge a "final agency action," as the APA requires before a court may exercise judicial review. Id. at 7-12.

Custodia had argued that an email from the Federal Reserve Board stating it had "no concerns" with the Kansas City Fed's decision to deny Custodia's master account application constituted final agency action. Id. at 7-8. But the court found the email "merely implemented...broader plans as they related to Custodia's application," and did not amount to a final agency action. Id. at 11-12.

In footnote 5, the Court noted that even if the APA claim were subject to judicial review, "the merits of the claim would rise and fall with Custodia's statutory-construction argument" discussed below. Id. at 12.

(2) Writ of Mandamus

The central issue here was whether federal law requires Federal Reserve Banks (like the Kansas City Fed) to approve eligible depository institutions (like Custodia) for master accounts at the Fed or leaves the Fed discretion to approve or deny applications.

The Court concluded Federal Reserve Banks have discretion to deny master account applications based on its interpretation of the Federal Reserve Act. So it granted summary judgement in favor of the Kansas City Fed and denied Custodia's writ of mandamus claim.

Arguments & Reasoning

Custodia argued that the Federal Reserve Act (in 12 U.S.C. § 248a(c)(2)) requires all Federal Reserve Banks to approve all legally eligible depository institutions.

Specifically, Section 248a(c)(2) states:

"All Federal Reserve bank services covered by the fee schedule shall be available to nonmember depository institutions and such services shall be priced at the same fee schedule applicable to member banks." (emphasis added).

Custodia argued that because this language requires Federal Reserve Banks to make services available to depository institutions, and the only way to access those services is through a master account, Section 248a(c)(2) must also require Federal Reserve Banks to grant depository institutions access to master accounts. See Order at 17.

Conversely, the Kansas City Fed argued that it has discretion to approve or reject applications by pointing to another section of the Federal Reserve Act, 12 U.S.C. § 342. Section 342 grants Federal Reserve Banks the discretion to receive or reject deposits. According to the Kansas City Fed, this authority "necessarily carries with it the discretion to grant or deny master accounts." Id. at 18-19.

In siding with the Kansas City Fed, the court pointed to factors such as:

  • Section 248a(c) "does not say anything about a master account," and is directed at the Federal Reserve Board, not Federal Reserve Banks.

  • The language Custodia relied on falls under a section titled "Pricing of services," not "Board of Governors of the Federal Reserve System," which would have been the more appropriate place to include a duty to approve master account applications.

  • Reading Section 248a to leave Federal Reserve Banks discretion best comports with Section 342.

  • As a matter of policy, if Federal Reserve Banks were required to give every state-approved depository institution a master account, this could lead to a "race to the bottom among states and politicians to attract business." Id. at 19-27.

Tie To Congress

Interestingly, in a turn from the Court's denial of the Fed's Motion to Dismiss last June, the Court cited to an NDAA Amendment from 2023 to support its holding. Specifically, the "Amendment" - codified in 12 U.S.C. § 248c - requires the Fed to create and maintain a database identifying who has a master account, who submitted an application, and whether the application was "approved, rejected, pending, or withdrawn." Id. at 26.

In Friday's Order, the Court reasoned that the Amendment supported its holding because the "rejected" option would otherwise be rendered meaningless. Id. at 22-27.

But as a key part of its rationale for denying the Fed's Motion to Dismiss in June, the Court had stated:

"Section 248c cannot be read as Congress' imprimatur on Federal Reserve Banks holding carte blanch to grant or deny master account applications. Section 248c does not, expressly or impliedly, carry the statutory construction load the Board of Governors asserts it does." See MTD at 11-12.

Former Senator Toomey - who sponsored the Amendment - had filed an amicus brief explaining the intent of the Amendment was solely to expand transparency at the Fed:

As its text makes clear—and as the Board knows from conversations with legislative staff during its draftingthe Amendment was exclusively a transparency measure...The Amendment does not opine on the question of whether or not other statutory or regulatory authorities do (or do not) allow for discretion in the master account approval process[.]" See Sen. Toomey Amicus Brief at 5 (emphasis added).

Former Senator Patrick Toomey (R-PA) voiced his opposition to the decision in an interview with Fox Business:

"The judge's decision is completely wrong. It was contradictory and inconsistent with his decision in June when he denied the Fed's request to dismiss the case. There's no logic here at all, and I hope Custodia decides to appeal."

Senator Cynthia Lummis (R-WY) also disagrees with the decision.

What's Next?

In a CNBC interview following the decision, CEO Caitlin Long said Custodia is considering an appeal, adding:

"Our Bitcoin custody business is unaffected and we're still in a U.S. dollar banking business through partner banks...We've had one hand tied behind our back or arguably two hands tied behind our back because, unfairly and illegally, in my view, we've not been able to get master accounts. But this is not over yet."

Look Ahead

Quick Hits

SEC Speaks

SEC Speaks is an annual program where the SEC Commissioners and senior staff share updates, initiatives, and priorities with the public.

  • This year, Commissioner Hester Peirce criticized the Commission's "dwindling" engagement with the public.

  • She drilled down on concerns with SAB 121:

    • "SAB 121 arguably does not protect investors. Its capital implications keep out of the business many banks and broker-dealers that have long years of custody experience. Moreover, as a consequence of being on the balance sheet, if the custodian fails, these assets could be treated as if they belong to the failed entity, not the customers of that entity."

    • Full Speech.

  • Enforcement Director Gurbir Grewal focused his speech on defending the SEC's crypto enforcement actions.

Illicit Finance

Around the World



Thank you for reading and see you next week.


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