Custodia not entitled to Fed master account, judge rules

The Federal Reserve is not required to give digital asset bank Custodia access to a master account, a judge ruled Friday.

Federal Reserve banks have discretion whether to grant master accounts, Judge Scott Skavdahl of the U.S. District Court for the District of Wyoming said in his ruling. judgement. This news is a hard blow for Custodia Bank, which for follow-up the Board of Governors of the Federal Reserve and the Federal Reserve Bank of Kansas City in 2022 for delaying a decision on its application to open a central bank main account.

This main account allows institutions to directly access the Fed’s payment systems and provides financial institutions with the most direct access to the U.S. money supply. Those without a master account are often forced to rely on partner banks with master accounts to provide their services.

“If Custodia’s position were correct, it would effectively mean that every depository institution licensed under state law, regardless of its soundness, is entitled to a master account allowing it direct access to the federal financial system,” the judge said.

According to the court document, Custodia alleged that the Federal Reserve violated the Administrative Procedure Act and said its actions were “arbitrary, capricious, an abuse of discretion, or not consistent with law.” Custodia asked the judge to force the board to issue a master account. The APA governs how federal agencies develop and issue rules.

The court denied APA’s request, in part because the board failed to take final action.

No main account

Custodia is not statutorily entitled to a master account, judge said

“The real dispute at the heart of this case is whether FRBKC should grant a master account to Custodia because he was legally eligible or whether FRBKC possessed the discretion to deny Custodia’s master account application despite his eligibility,” a declared the judge.

Custodia filed its request with the Kansas City Fed in 2020. In spring 2021, the Federal Reserve Board of Governors stepped in and requested control of the decision-making process.

Custodia’s master account application was denied in January 2023. Custodia did not immediately respond to a request for comment.

Custodia is subject to Wyoming law and is a special purpose depository institution, which are banks that receive deposits and may hold them, among other activities. However, they cannot lend “escrow deposits to their clients” and must keep these deposits 100% in reserve, according to Custodia. website.

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