Custodia Bank Loses Claim To A Fed Master Account Following Court Ruling – Details

A United States judge has ruled against Custodia Bank’s claim to membership and a master account with the Federal Reserve. The digital asset bank had initially sued the Fed in 2022 for delaying a decision on whether or not to grant the bank a master account.

Interestingly, the Federal Reserve rejected the bank’s membership and master account applications in January 2023. This move came after confirming Custodia’s eligibility to submit these requests to the US central banking system.

Why Custodia Bank Applied For Fed Master Account And Membership

On Friday, March 29, Judge Scott Skavdahl rejected Custodia Bank’s bid to obtain a Federal Reserve master account, according to a filing submitted to the United States District Court of Wyoming. 

The master account is referred to as “a bank account for banks,” which grants deposit institutions access to the Fed’s services, including its payments system.

As disclosed in the March 29 court filing, Custodia argued that it won’t be able to directly access the Federal Reserve and offer similar custodial services for crypto assets as some other banking institutions currently do without a master account.

“Without a master account, if Custodia is able to operate at all, it is as a second-class citizen, relegated to dependency on and fealty to an intermediary bank (which does have a master account),” the digital asset claimed.

The court document revealed that Custodia applied to the Board of Governors for membership in the Federal Reserve in August 2021. According to the bank, a membership would subject it to oversight and regulation by the Fed Board.

The bank, however, clarified that:

It is not necessary to be a member bank in order to receive a master account…Custodia, however, took this additional step to demonstrate to FRBKC (Federal Reserve Bank of Kansas City) and the board its willingness to submit to full federal supervision and accountability.

Why The Federal Judge Dismissed Request For Master Account

In its updated argument, Custodia contended that all legally eligible depository institutions (including itself) should receive a master account and that the Fed didn’t have the right to reject applications from non-member depository institutions.

However, Judge Skavdahl ruled that Custodia Bank cannot receive a master account from FRBKC just because it is legally eligible to apply for one. According to the court filing, the Fed retains the discretion in granting or denying requests for master accounts.

Ultimately, the judge declared that the digital asset bank is not entitled to its requested writ of mandamus, compelling the Federal Reserve Bank of Kansas City to grant it a master account, thereby ruling in FRBKC’s favor.