Crypto bank Custodia sues the Fed over 19 month delay on account approval

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

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

The bank was founded by Caitlin Long, an early advocate of Bitcoin (BTC) who established the institution in 2020 to provide accounts for crypto companies and serve as a bridge for them to the U.S. dollar payment system.

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

Nathan Miller, a spokesperson for Custodia Bank, told Cointelegraph:

“Through this lawsuit, Custodia seeks to ensure that its Federal Reserve master account application receives the fair dealing and due process guaranteed to it by both federal statute and the U.S. Constitution. Custodia has satisfied every rule applicable to it, and has gone beyond by applying to become a Fed member bank.”

The suit claims the Federal Reserve violated a United Stated Code, which outlines a one-year deadline for processing the application, and says that it even states on the master account application that a decision takes five to seven business days.

The Fed’s Kansas City bank was ready to approve the account before the Federal Reserve Board asserted control over the process in spring 2021, thereby “derailing” the application, Custodia says.

Custodia states that the “black-box bureaucratic process” meant it had exhausted “all options short of litigation” and sought to compel the Federal Reserve and its Kansas City bank to approve its master account within 30 days.

Custodia plans to provide final settlement for U.S. dollar payments in digital asset transactions, along with providing digital asset custodial services. A key part of its service is to clear payments for its customers directly with the Fed, which it says will reduce costs, counterparty credit risk and delays in settlement.

The delay has postponed Custodia’s full entry to the market and forced the bank to partner with another bank that already has a master account. It says this is a “makeshift solution” that is “second best and far more expensive”.

Related: Fed governor explains who needs crypto regulation and why demand for it is growing

If Custodia wins the suit or is granted a Fed master account, it will be the first digital asset bank in the country to secure one.

In December 2021, the Republican senator for Wyoming Cynthia Lummis claimed the Fed was "violating the law" with its unfair treatment of SPDIs like Custodia through delaying applications to receive master accounts.

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