Litigation involving the Federal Reserve is rare, and rarer still is a lawsuit that actually survives to go to trial. This past year saw the former, and every indication is that the latter will arrive in 2023.
Custodia Bank, a Cheyenne, Wyoming-based digital asset bank, sued the Fed claiming the central bank unduly delayed making a decision on its application for an account with Federal Reserve Bank of Kansas City.
Despite the Fed's best efforts to have the case dismissed — as it was able to do with two previous suits involving so-called master accounts — a U.S. District Court judge in Wyoming has found Custodia's claims credible enough to be hashed out in open court.
At face value, the suit deals with the issues of what institutions can access master accounts — which offer holders access to the Fed's payments system and discount window — and on what grounds. Both topics are of great interest to both nontraditional banks that would like master accounts as well as traditional ones, which want to ensure they aren't being placed at a competitive disadvantage to less regulated fintechs.
Beyond those issues, Custodia's suit raises more fundamental questions about the relationship between the Fed Board of Governors and the regional reserve banks, a topic that has vexed financial institutions, politicians and scholars alike.
What follows is a review of the case and the politics surrounding it.