The bid for a U.S. Federal Reserve master account by Custodia Bank, a digital asset bank, has hit a legal roadblock as the United States District Court for the District of Wyoming has ruled against it.
Custodia’s plea for a declaratory judgment was dismissed by the court, but the bank remains undeterred, vowing to explore all available avenues, including a potential appeal.
In the court’s decision on March 29, Judge Scott Skavdahl rejected Custodia’s request for a Federal Reserve master account, which is pivotal for granting financial institutions access to the Federal Reserve’s payment systems, often dubbed as a “bank account for banks.”
Custodia had argued that without such an account, it would be disadvantaged compared to other banking institutions, especially in providing custodial services for crypto-assets.
The bank contended that being reliant on an intermediary bank would classify it as a “second-class citizen.”
Moreover, Judge Skavdahl ruled that Custodia cannot compel the Federal Reserve Bank of Kansas City to issue its master account, denying Custodia’s request for a writ of mandamus.
This setback follows Custodia Bank’s initial application for a Federal Reserve master account in October 2020, which was rejected by the Federal Reserve in January 2023 due to concerns about its involvement in the crypto space conflicting with legal requirements.
Custodia Bank, a pioneering Special Purpose Depository Institution (SPDI) in Wyoming, also referred to as a “blockchain bank,” was established to provide banking services to businesses engaged in crypto-related activities.
However, the denial of its master account application raises questions about the regulatory challenges faced by crypto-friendly banks.
The setback for Custodia Bank comes amidst the backdrop of the collapse of several crypto-friendly banks in 2023, including Silvergate Bank, Signature Bank, Silicon Valley Bank, and First Republic Bank.
The failure of Silvergate and Signature was partly attributed to the crypto market downturn of 2022. Likewise, the closure of Heartland Tri-State Bank was prompted by its CEO’s involvement in a cryptocurrency scam.