Custodia has accused the Federal Reserve Board (FRB) of getting in the way of innovation by unduly prolonging the process of granting access to the central bank’s payment system.
In a lawsuit filed last week, Wyoming-chartered crypto bank Custodia says the FRB “unlawfully” delayed its decision on whether to grant it access to its payment system.
Custodia, formerly Avanti, was the second bank after Kraken to obtain Wyoming state’s pioneer crypto charter in October 2020, which allows it to take deposits and offer crypto-custody services.
It applied to the Kansas Fed for direct access in October 2020, which it says would sharply reduce its costs, facilitate new financial products and options, and carries some additional prestige.
“Direct access to the Federal Reserve is vital to Custodia’s ability to operate effectively and efficiently in pursuit of its core mission to offer a secure, compliant bridge between digital assets and the United States dollar payment system,” the crypto firm says in the complaint seen by VIXIO.
If granted access, Custodia would be the first bank of this kind to get access to the central bank payment system.
According to Custodia, since filing the application, the firm has engaged with the regulators via regular meetings, calls, emails and thousands of pages of responses to various inquiries.
Despite that, more than 19 months have passed “without a decision on Custodia’s master account application, and no assurance has been provided that a decision is forthcoming at all, let alone in the near future”.
It also stresses that master account decisions typically take five to seven business days.
In addition, the crypto bank alleges that the FRB and the Kansas Fed are acting in secrecy and pointing at each other as a reason for not processing the application.
“There is a black-box bureaucratic process with no clear rules or standards for processing applications, no clear lines of accountability or responsibility between the [FRB] and Kansas City Fed, and no clear end to Custodia’s application saga in sight.”
Custodia now argues that the 19-plus-month delay violates the one-year statutory deadline, and asks the court to order the FRB and the Kansas City Fed to “promptly” decide on its application for a master account.
Custodia says it first provided its business plan to the Kansas Fed in May 2020 and formally filed for access in October, after it received the special state charter in Wyoming.
During their communications, the Kansas Fed confirmed that Custodia’s application was complete, the company is eligible for the master account and that there were no “showstoppers” with Custodia’s application.
The process, however, was derailed in May, when the FRB launched a consultation over master account applications by state-chartered crypto firms, noting the increasing number of such requests.
The FRB said it is important to ensure these requests are evaluated in a consistent and transparent manner.
Following the consultation, in March this year, the FRB proposed a three-tier framework. However, larger industry players, such as bank associations and The Clearing House (TCH), were pushing for further clarity in the guidelines, which could cause further delay in finalising the rules.
Custodia says the 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”.
“Through this lawsuit, Custodia seeks to ensure that its Federal Reserve master account application receives the fair dealing and due process guaranteed to it by both federal statute and the U.S. Constitution,” Nathan Miller, a spokesperson for Custodia, told VIXIO.
Custodia received a routing number earlier this year, a requirement for opening a master account. Although a significant step, it does not guarantee that a decision on the application by the central bank is close to hand.