Wyoming Crypto Bank Seeks Full Court Review Following Fed Account Denial

Custodia, a cryptocurrency bank chartered in Wyoming, has formally petitioned the entire Tenth Circuit Court of Appeals to reassess the Federal Reserve’s refusal of its master account application. This pursuit escalates an ongoing legal confrontation spanning over five years, focusing on the interpretation of federal laws and the implications for the bank's state charter.

Key Takeaways

Custodia has requested a full court review of the Federal Reserve's denial of its master account application, asserting a misinterpretation of federal law.
The bank claims the Fed’s decision undermines its state charter and poses constitutional concerns regarding the Fed's authority.
This case highlights a growing split among judges in the Tenth Circuit regarding master account access under the Monetary Control Act.
Custodia's situation reflects wider issues in the banking industry, as many crypto firms face excessive restrictions from major banks.

Custodia’s Legal Battle Intensifies

Custodia, a crypto bank based in Wyoming, has intensified its legal efforts by filing a petition with the full Tenth Circuit Court of Appeals. The bank is requesting a reconsideration of the Federal Reserve’s denial of its application for a master account, a move that escalates a legal battle that has persisted for five years.

In its petition, dated December 15, Custodia argues that a decision made by a panel in October misinterpreted federal law and presents constitutional issues regarding the authority of the Federal Reserve. The request for an en banc review seeks to have all active circuit judges assess whether regional Federal Reserve Banks have the ability to exercise unreviewable discretion when granting master account access to legally qualified institutions.

Challenging the Federal Reserve’s Authority

Custodia argues that the recent ruling by the three-judge panel, which concluded in a 2-1 decision, contradicts the Monetary Control Act’s requirement that payment services “shall be available” to nonmember depository institutions. The bank believes this creates an unconstitutional power of veto over state banking charters.

The petition raises important questions about federalism, highlighting how the Fed’s actions effectively nullify Wyoming's 2020 decision to charter Custodia as a Special Purpose Depository Institution. Without access to a master account, Custodia cannot offer essential Federal Reserve services such as wire transfers and automated clearinghouse systems, rendering its state-issued charter almost irrelevant despite fulfilling all eligibility criteria.

“When the Fed denies a master account to a state-chartered financial institution, it effectively vetoes a bank charter that state regulators have approved,” stated the petition.

Wyoming introduced its SPDI framework with the intention of attracting digital asset companies, mandating 100% reserve backing and prohibiting lending to minimize risk. Custodia claims that the Fed’s denial threatens this regulatory framework designed to promote blockchain innovation within firm safety limitations.

The constitutional issues extend further than just federalism.

Custodia’s legal representatives argue that if the presidents of regional Reserve Banks have unreviewable discretion regarding master accounts, they effectively function as “Officers of the United States,” exerting considerable executive authority without appropriate constitutional appointments.

Emerging Judicial Disagreement

The petition sheds light on the increasing conflict among judges in the Tenth Circuit regarding the interpretation of statutory law.

Judge Timothy Tymkovich’s dissent aligns with Judge Bacharach’s previous opinion in the Fourth Corner Credit Union case against the Federal Reserve Bank of Kansas City, highlighting a split among circuit judges concerning whether the Monetary Control Act requires access to master accounts.

Tymkovich expressed that the Fed's interpretation provides “unreviewable discretion” that raises complicated questions under Article II, contradicting the plain language of the Monetary Control Act, which specifies that services should be “available to nonmember depository institutions.”

In January 2023, the Kansas City Fed denied Custodia’s application after a lengthy 27-month review, citing concerns over its “crypto-asset activities.” This decision came after earlier indications that there were “no showstoppers” regarding the application.

Internal documents from the Fed suggested that staff considered Custodia’s capital “adequate” and praised its “impressive” management team, only for officials from the Board of Governors to intervene.

Recently, Federal Reserve Governor Christopher Waller acknowledged that the Fed has sufficient tools to address risks without outright denying master accounts. In an interview in October, he suggested that the Fed could “tailor” account structures to align with specific bank risk profiles, challenging the rationale for blanket denials.

Systematic Debanking Challenges in the Crypto Industry

Custodia’s ongoing legal struggle comes amid increasing scrutiny of federal regulators regarding widespread debanking practices aimed at crypto firms.

In December, the Office of the Comptroller of the Currency released findings indicating that all nine of the largest national banks imposed “inappropriate” restrictions on lawful businesses, including those in the digital asset sector, between 2020 and 2023.

Major banks such as JPMorgan Chase, Bank of America, Citibank, and Wells Fargo have been found to maintain internal policies that require heightened approvals or blanket restrictions on sectors they perceive as misaligned with their institutional values.

The review encompassed thousands of complaints relating to political and religious motivations for debanking, as well as exclusions based on crypto involvement.

While banks have stated they do not discriminate, the OCC identified many of these restrictive policies as publicly visible.

Recently, Strike CEO Jack Mallers claimed that his accounts were abruptly closed due to vague references to “concerning activity,” fueling allegations of coordinated exclusion despite denials from regulators.

The issue has gained further attention following President Trump’s executive order in August, which aimed to prevent banks from denying services solely based on customers' crypto-related activities.