Dive Brief:

• A judge on Friday denied the Federal Reserve’s August motion to dismiss the master account lawsuit brought by Custodia Bank, ruling the bank had sufficiently argued that the Kansas City Fed engaged in “unreasonable delay” in processing its master account application.
• Custodia, which was granted a special-purpose depository institution (SPDI) license in Wyoming in 2020, has been waiting two years for the Fed to approve its application for a master account, a delay the bank has called “unlawful.”
• Citing an argument the bank put forth, Judge Scott Skavdahl of the U.S. District Court for the District of Wyoming ruled Custodia had plausibly argued unreasonable delay because the Fed’s standard form agreement states “[p]rocessing may take 5-7 business days.”

Dive Insight:

The ruling is a win for the crypto-focused bank, which was founded in 2020 by Caitlin Long, a former managing director at Morgan Stanley.

The bank was among the first to be granted an SPDI charter under Wyoming’s crypto-friendly law, which passed in 2019. 

The bank has maintained that a master account is vital to its ability to operate effectively and efficiently since it would allow the firm to access the Fed’s banking system for clearing U.S. dollar transactions without having to use an intermediary bank.

Custodia’s claim that its application has been unreasonably delayed by the regulator holds water, Skavdahl ruled.

The master account agreement the bank submitted “suggests that a standard financial institution can expect a decision on their master account application in a matter of days, whereas Custodia’s application has been pending for two years,” Skavdahl wrote.

The bank was also informed that its application had “no showstoppers,” Skavdahl wrote. This suggests the application had been considered and was on track to be granted, he added.

The bank claims the Kansas City Fed said in a January 2021 letter that Custodia was legally eligible for a master account, Skavdahl wrote. However, the bank was informed in March that the Kansas City Fed had not started processing the application, he added.

“Considered together, the Court has little difficulty concluding Custodia has asserted a plausible cause of action for unreasonable delay against [The Fed and the Kansas City Fed.]”

But the Fed has defended the time it has taken to process Custodia’s application, claiming in a court brief last month the bank’s crypto ambitions “present substantial risks and complexities requiring careful and diligent review.”

While the judge advanced Custodia’s case, he dismissed several complaints the bank raised.

Skavdahl dismissed the bank’s claims that the Fed defied the separation-of-powers doctrine, due process and the appointments clause of the Constitution.