Custodia Bank fails in court: No Federal Reserve Master Account

Custodia Bank fails in court: No Federal Reserve Master Account

Digital Asset Bank Custodia Bank has not been granted a US Federal Reserve Master Account by the United States District Court for the District of Wyoming. The court rejected Custodia's request for a clarifying judgment, but the bank remains resolute and is exploring all available options. The court's decision is currently being reviewed by Custodia and the bank is considering an appeal.

In the court's March 29 ruling, Judge Scott Skavdahl denied Custodia's request to obtain a Federal Reserve master account. Such an account, often referred to as a “bank account,” provides financial institutions with access to the Federal Reserve’s payment systems. Custodia argued that without a master account, the bank would be at a disadvantage compared to other banking institutions when it comes to offering custody services for crypto assets. The lack of a master account would force Custodia to be dependent on and in cooperation with an intermediary bank, which the bank would describe as “second class citizens”.

Additionally, Judge Skavdahl ruled that Custodia does not have standing to reverse the decision of the Federal Reserve Bank of Kansas City (FRBKC). Custodia submitted an application for a Federal Reserve Master Account in October 2020. Approval of the application would have given the bank access to the Fedwire network, which processed over 193 million transactions in 2023. However, Custodia's membership application was rejected by the Federal Reserve in January 2023 as its involvement in the cryptocurrency space was deemed inconsistent with legal requirements.

Custodia Bank was founded in Wyoming as a pioneer of Special Purpose Depository Institutions (SPDIs), also known as “blockchain banks.” These institutions are intended to support companies that have difficulty obtaining banking services from the Federal Deposit Insurance Corporation due to their activities in the cryptocurrency space.

In 2023, four major US banks have failed, including Silvergate Bank, Signature Bank, Silicon Valley Bank and First Republic Bank. The failure of Silvergate and Signature was partly linked to the crypto crash of 2022. Heartland Tri-State Bank, a community bank in Elkhart, Kansas, was also forced to close last year after its CEO, Shan Hanes, lost millions of dollars in a cryptocurrency scam.

The table below shows one of the failed banks in 2023:

It remains to be seen whether Custodia Bank will appeal the court's decision and whether this will impact the endeavors of other blockchain banks and financial institutions in the cryptocurrency space.