Custodia Bank Challenges Federal Reserve’s Authority in Master Account Dispute

UTC by Temitope Olatunji · 3 min read
Custodia Bank Challenges Federal Reserve’s Authority in Master Account Dispute
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Custodia’s lawyers argue that the Federal Reserve treating state-chartered banks differently when they try to get master accounts may go against the Monetary Control Act.

Custodia Bank, a digital banking firm, has filed a request with the 10th Circuit Court of Appeals. They are challenging a decision made by a judge in Wyoming. The judge had given the Federal Reserve the power to deny Custodia’s request for a master account. In this new request, Custodia is asking the appeal court to cancel the judge’s decision and grant their demand.

Custodia Bank Appeals to 10th Circuit Court

To represent the company, Custodia CEO Caitlin Long has hired two experienced lawyers who have argued cases in the Supreme Court before. The lawyers claim that the Federal Reserve’s power to deny master accounts to banks with state charters goes against the dual banking system. This system allows banks to choose whether to operate under a state or federal charter.

Custodia’s lawyers argue that the Federal Reserve treating state-chartered banks differently when they try to get master accounts may go against the Monetary Control Act, which is meant to make sure all banks have fair access to the Fed’s services.

The brief points out that the Monetary Control Act using the word “shall”, suggests that all Federal Reserve bank services must be available to non-member depository institutions. The defendant also referred to the  Cantero v. Bank of America case of the dual banking system. They stated:

“The United States maintains a dual system of banking, made up of parallel federal and state banking systems.That dual system allows privately owned banks to choose whether to obtain a charter from the Federal Government or from a state government.”

In the brief submitted, the digital banking firm argued that the Federal actions should not be immune from judicial review. They claim that mandamus relief and the Administrative Procedure Act can be used to challenge the Federal Reserve’s decisions. The filing also emphasizes the dual banking system’s long history, which has existed for over 150 years and has remained strong in responding to the economy. It revealed:

“Nor is there any basis to conclude that the Fed’s actions here are immune from judicial review when the Fed defies a congressional command. Mandamus relief is available against FRBKC (at minimum), and the APA provides a remedy against the Board.”

The lawyers also asserted that in 2019, Wyoming passed a law allowing qualified applicants like Custodia to obtain a Special Purpose Depository Institution (SPDI) charter. They argue that the Federal Reserve’s refusal to grant a master account to an eligible SPDI is discriminatory.

Thus, it could be recalled that in April, a digital banking firm filed an appeal against a court ruling that backed the Federal Reserve’s rejection of its bid for a master account. According to the ruling then, it was stated that the Kansas City Fed had the power to reject the firms’ proposal for a master account. The Judge said that the bank did not provide enough evidence to show that the Federal Reserve’s main Board pressured the Kansas City branch to reject its request.

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