April 17, 2024

Wyoming crypto bank not backing down in fight to access Federal Reserve

Custodia Bank, a Wyoming crypto bank that has been locked in authorized fight with the Federal Reserve for almost two years, is contemplating an enchantment of a district choose’s resolution to deny it access to the Fed’s banking amenities, FOX Business has discovered.

Custodia, certainly one of 4 crypto banks in Wyoming, tells FOX Business it believes the choose’s resolution was mistaken, and it’s contemplating all of its choices, together with an enchantment.

“If this decision stands, only the big, leveraged New York banks at the center of the financial system will be allowed to bank the crypto industry through the bitcoin ETFs,” a Custodia spokesman informed FOX Business. “And they do this without the risk management protections that Wyoming banks proposed.”

A win for Custodia would have been a milestone achievement for the $2 trillion crypto industry which, till the Securities and Exchange Commission’s January approval of 11 bitcoin ETFs, has been largely shunned by Wall Street and the standard banking system, deemed an excessive amount of of a fringe and mistrusted trade by the federal authorities.


Custodia is not assured to win an enchantment. Legal specialists who’ve been following the case believe the bank could certainly have credible grounds for enchantment based mostly on what they’re calling a baffling change of coronary heart by Judge Scott Skavdahl.

“The judge’s decision is completely wrong,” former Pennsylvania Sen. Pat Toomey informed FOX Business. “It was contradictory and inconsistent with his decision in June when he denied the Fed’s request to dismiss the case. There’s no logic here at all, and I hope Custodia decides to appeal.”

Sen. Pat Toomey

Pat Toomey, identified for his pro-crypto insurance policies whereas in Congress, retired from the Senate in January 2023. (Tasos Katopodis/Getty Images / Getty Images)

Toomey, identified for his pro-crypto insurance policies whereas in Congress, retired from the Senate in January 2023 and now sits on the boards of crypto trade Coinbase’s Global Advisory Council and crypto funding agency Paradigm.

He was additionally certainly one of a handful of Republican lawmakers, alongside senators Cynthia Lummis of Wyoming and Kevin Cramer of North Dakota and Rep. Warren Davidson of Ohio, to write an amicus temporary in support of Custodia in its bid to get access to the Fed’s banking companies. The temporary argued that Congress supposed for all banks to get equal access to the Fed’s cost system on a non-discriminatory foundation.

Lummis, in a Friday post on X, expressed her disappointment with the choose’s ruling.

“Wyoming SPDIs have the right to access master accounts,” she wrote. “It is past time the Fed follows the laws passed by Congress.”

Cynthia Lummis

Sen. Cynthia Lummis, R-Wyo., speaks in the course of the Bitcoin 2021 convention in Miami, Fla., June 4, 2021. (Eva Marie Uzcategui/Bloomberg through Getty Images / Getty Images)

SPDIs, or particular objective depository establishments, are banks that, beneath Wyoming legislation, are allowed to custody crypto in the event that they maintain reserves backing 100% of the digital property on deposit. The Wyoming Division of Banking permitted 4 SPDIs between 2020 and 2021, though none have been sanctioned by the Federal Reserve.

Other outstanding figures in the crypto world are additionally calling for Custodia to enchantment what they see as the most recent offensive in opposition to the cryptocurrency trade.

“This is a blatant example of yet another hostile attack on crypto by entrenched special interests represented by Elizabeth Warren,” SkyBridge Capital founder Anthony Scaramucci informed FOX Business.

Warren, the senior senator from Massachusetts and an influential progressive voice in Washington, has lobbied arduous in opposition to giving the crypto trade access to the federal banking system due to its affiliation with cash laundering and different fraudulent actions. The Fed is cautious of crypto due to its potential to improve systemic danger in the leveraged monetary system.

Senator Elizabeth Warren

Sen. Elizabeth Warren, D-Mass., speaks throughout a Senate Banking Committee listening to on Capitol Hill June 13, 2023, in Washington, D.C. (Michael A. McCoy/Getty Images / Getty Images)


Custodia, which operates an unlevered enterprise mannequin, sued the Federal Reserve Bank of Kansas City and the central bank’s board of governors in June 2022 on account of the establishment taking months to resolve whether or not to subject Custodia a so-called grasp account, which supplies state-chartered banks with a depositary account on the Fed, as a substitute of them having to undergo middleman banks.

According to the applying on the Fed’s web site, the approval course of normally takes 5 to seven days. In Custodia’s case, it stretched over two years.

Following the November collapse of FTX, the crypto trade run by convicted fraudster Sam Bankman-Fried, the Kansas City Fed finally denied Custodia’s software in January 2023, citing uncertainty about Custodia’s government crew, monetary standing and the power of the state of Wyoming to successfully regulate banks that custody crypto.

sam bankman-fried

Former FTX CEO Sam Bankman-Fried arrives for a bail listening to at Manhattan Federal Court Aug. 11, 2023, in New York City. (Michael M. Santiago/Getty Images / Getty Images)

For many sincere crypto corporations nonetheless hoping to get access to the U.S. banking system, the collapse of FTX led to a domino impact simply 4 months later as a number of crypto-related firms and legacy establishments like Silicon Valley Bank, Silvergate and Signature banks imploded due to the liquidity crunch.

As a outcome, the nation’s banks grew to become warier than ever about associating with corporations that did enterprise with crypto.

Custodia believed its distinctive enterprise mannequin, which proposes holding larger reserves than the quantity of buyer deposits to mitigate liquidity dangers, would assist persuade the Fed to look past it as a possible legal responsibility.

It was mistaken.

Custodia took the denial of its software as a politically motivated try to block its access to the central banking system due to its affiliation with crypto, now on the federal government’s radar as a fraudulent trade due to the antics of Bankman-Fried.

Custodia amended its lawsuit after the denial, stating its perception that the Fed’s board of governors in Washington could have unlawfully intervened on the Kansas City department to affect its resolution. To support this declare, Custodia cited prior constructive engagement with the Kansas City Fed workers earlier than the denial and pointed to what it seen as a doubtful reversal in its resolution to deny.

The Fed, for its half, maintained that Congress gave it full discretion to approve or deny depository establishments, no matter eligibility.

In suing the Fed, Custodia hoped {that a} impartial choose would see its rationale that the central bank’s actions had been the results of a hostile federal authorities intent on choking off the crypto trade from the lifeblood of the federal cost system. It additionally hoped it will assist put fellow state-chartered banks on a degree taking part in area with federal establishments in phrases of access to the Federal Reserve.

Federal Reserve

The Federal Reserve Building in Washington, D.C. (iStock / iStock)

It’s not the primary time the Fed has mentioned no to a state bank looking for a grasp account. Since 2015, the Fed has denied 33 uninsured state-chartered establishments, prompting critics to fear the central bank has given itself an excessive amount of energy by turning itself right into a quasi-chattering entity.

It’s additionally not the primary time the Fed has confronted a lawsuit for seemingly arbitrarily chopping off a bank due to its purchasers that deal in companies not sanctioned by the federal authorities.


In 2015, Colorado-based Fourth Corner sued the Kansas City Fed for not giving it access to a grasp account due to its affiliation with marijuana-related companies. After being frequently rebuffed by the Fed, the corporate mentioned it will solely cater to ancillary marijuana corporations and organizations, not to people who dealt straight with the substance. Under these phrases, the Fed mentioned it will “conditionally grant” the bank a grasp account.

Toomey and lots of others who adopted the case had been moderately assured of a constructive final result for Custodia based mostly on Skavdahl’s opinion in his June 8 denial of the Fed’s movement to dismiss the case in opposition to it.

For starters, he criticized the Fed for taking “longer than the gestation period of an elephant” to course of Custodia’s software. He additionally mentioned the rules Congress laid out for the Fed can’t be interpreted as giving the establishment carte blanche to approve or deny grasp account functions, throwing chilly water on the Fed’s argument that it has full discretion to approve or deny establishments on any grounds it sees match.

Skavdahl additionally denied the Fed’s request to throw out the case, ruling that Custodia made believable arguments that the Federal Reserve’s board of governors could have violated the Administrative Procedure Act by presumably intervening in the denial of Custodia’s software. He additionally mentioned Custodia made cheap arguments that it would qualify for aid beneath the Mandamus Act, which might have basically pressured the Fed to present it with a grasp account.


That’s why Friday’s resolution, which acknowledged the Fed is not legally required to present eligible establishments with a grasp account and that Custodia attorneys failed to show the board of governors influenced the Kansas City Fed’s resolution to deny its account, got here as a shock to many, together with Custodia executives and specialists who had been concerned in the case.

“It is completely contradictory and inconsistent to his prior statements,” mentioned Toomey, “and the fact he offers no explanation – I trust and hope that will be a relevant factor in any appeal.”

While Toomey says he does not know what made the choose change his thoughts, he tells FOX Business he believes it is the byproduct of the federal authorities’s capricious opposition to the digital asset trade.

“Custodia should have been granted FDIC insurance, but because the FDIC is politicized and has chosen arbitrarily that they will disfavor this entire sector, that’s what’s sent us down this path,” he mentioned.

FDIC logo

The Federal Deposit Insurance Corporation (FDIC) constructing March 17, 2023. (Celal Gunes/Anadolu Agency through Getty Images / Getty Images)

In January 2023, the identical month the Kansas City Fed denied Custodia’s grasp account software, the Fed’s board of governors, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued warnings to member banks concerning the dangers of associating with crypto, highlighting liquidity headwinds that may very well be detrimental to their stability sheets.

One of the Fed’s arguments for rebuffing Custodia’s software is that it’s not FDIC-insured, regardless of Custodia’s makes an attempt to search insurance coverage in the previous. However, the FDIC, as Toomey talked about, will not insure crypto-related companies.


The Fed’s database additionally lists greater than 500 grasp account holders which are not federally insured and a handful of belief firms which are legally prohibited from accepting deposits, akin to Fidelity Management Trust Company and Raymond James Trust Company. The State of Texas Comptroller of Public Accounts additionally has a grasp account with the Fed.

In its abstract judgment temporary, Custodia’s attorneys raised this, questioning why the Fed was granting access to Texas’ chief tax collector and a slate of non-banks whereas denying access to eligible depository establishments like Custodia, Connecticut-based Narrow Bank and California’s PayServices.

The Federal Reserve did not instantly reply to a request for remark.

The timeline for a possible enchantment by Custodia is unclear, however the bank appears decided not to go down with no fight.