Court denies Wyoming's bid to join Custodia suit against Fed

Bloomberg News

The state of Wyoming was blocked from joining a lawsuit challenging the Federal Reserve's process for granting access to its payments systems.

Last week, Kelly Rankin, a judge in the U.S. District Court in Wyoming, denied the state's motion to intervene in a suit filed by Custodia Bank, in which the Cheyenne, Wyoming-based digital asset bank is contesting the Fed's handling of so-called master accounts.

Rankin said the state had no standing in the case and that its presence would only further complicate the matter. He added that it would put an undue burden on the Fed as a defendant.

Wyoming had sought to join the suit on the grounds that the Fed's decision to deny Custodia's application for a master account — which serves as a single point of access to the central bank's various financial services — undercuts the state's special purpose depository institution, or SPDI, framework. 

The SPDI is the first state-level regulatory structure for banks focused on crypto-assets. Wyoming argued that by not allowing a bank chartered under this regime to access its payments services, the Fed has violated the principles of the country's dual banking system, in which states can be chartered at both the state and national levels.

But, Rankin ruled that this argument is not material to Custodia's main complaint, which challenges whether the Fed has the right to deny a legally chartered bank access to its payments system.

"This change is like going to a mechanic for an oil change, then being told you need to replace your rear-view camera," Rankin wrote. "Two unrelated concepts with no relation to each other, yet still part of the same vehicle."

The ruling solidifies the fact that Custodia's challenge, which has pushed the Fed deeper into the legal process than any other lawsuit in recent memory, has narrowed to a single argument: whether a provision of U.S. code that says the Fed "shall" make its services available to nonmember depository institutions entitles all banks to have master accounts.

When it first filed suit against the Fed last June, Custodia cited a host of arguments for why the central bank was in the wrong for its handling of its master account application. Some of those, including claims about violating the separation of powers doctrine and the Appointments Clause of the Constitution, were tossed out last November. 

In January, the Fed Board of Governors denied the bank's bid to become a state member bank and the Reserve Bank of Kansas City rejected the bank's master account application, nullifying Custodia's arguments about an unreasonable delay. 

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Custodia has since filed a new complaint, accusing the federal government of orchestrating a coordinated effort to deny it a master account in violation of the Monetary Control Act of 1980. 

The Fed maintains that it has full discretion to block applicants that present a risk to the stability of the banking system. In a March report on its decision to deny Custodia's application, the central bank cited a litany of issues including a lack of deposit insurance, poor liquidity risk management practices and insufficient money laundering controls. It also highlighted risks associated with Custodia's dependence on the "speculation and sentiment"-driven crypto sector.

Reached for comment this week, Custodia spokesperson Nathan Miller said the court's denial of Wyoming's petition to intervene will have no bearing on the bank's case against the Fed. He noted that the ruling states that Wyoming can still file amicus briefs in support of Custodia, as it did last September.

 "We appreciate the support shown by the State of Wyoming and believe that its views should be considered by the Court, whether as a party or as an amicus," Miller said. "The Court's decision has no impact on Custodia's claims."

The Fed declined to comment on this report. Wyoming Attorney General Bridget Hill did not respond to a request for comment.