Axios Pro Exclusive Content

Crypto bank Custodia files lawsuit against Federal Reserve

Illustration of hands pointing at one another, collaged with money elements.

Illustration: Shoshana Gordon/Axios

Custodia, a Wyoming-based crypto bank, filed a lawsuit against the Federal Reserve and Kansas City Fed on Tuesday, accusing the two of harming its business to the benefit of financial giants by delaying a critical application for over a year,

Why it matters: Custodia is going on the offense in a move that could affect other crypto and fintech companies seeking a s0-called master account.

What they're saying: "Continued delay ... prevents newcomers like Custodia from introducing innovation and competition in the financial services marketplace and, not coincidentally, benefits the established financial institutions whose interests are represented on the Board of Directors of the Kansas City Fed," the lawsuit alleges.

Context: Founded by Morgan Stanley and Credit Suisse veteran Caitlin Long, Custodia filed for a master account with the Federal Reserve in October 2020.

  • The master account would lower costs and increase the speed of transactions for Custodia. It would also allow the company to introduce new products.
  • Custodia had previously taken a more friendly approach to the delays over its application.

Yes, but: Roughly 19 months later, neither the Federal Reserve nor the Kansas City Fed have reached a decision on the application.

  • Custodia alleges the Federal Reserve and Kansas City Fed are acting unlawfully, given the federal statute that requires all federal banking agencies to process completed applications within a year.

The bigger picture: A decision on Custodia's master account would be monumental.

  • Fed chairman Jerome Powell in January said he believed approving charters for the likes of the Wyoming-based fintech would open the floodgates.
  • "If we start granting these, there will be a couple hundred of them soon," he said during his confirmation hearing. "They’re hugely precendential, which is why I'm taking my time on this." 

Looking forward: It remains uncertain that the Fed will approve Custodia's application, but the lawsuit could light a fire under regulators and open up a broader debate about transparency around the Fed.

  • "Lawsuits sometimes just shame government regulators into doing things that they have to do," Julie Hill, a professor of law at the University of Alabama, says.
  • The Federal Reserve has not historically had to explain why it rejects or accepts a master account application.

The intrigue: The crypto bill sponsored by Sens. Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-Wyo.) also takes aim at the issue of master accounts. If passed, it would effectively order the Federal Reserve to give the likes of Custodia a master account.

Of note: Custodia is currently operating with a correspondent bank that has a master account.

  • It has raised about $37 million from Coinbase Ventures, Slow Ventures, Binance, DCG, PJT Partners, the University of Wyoming Foundation and others.
Go deeper