The banking lobby has thrown its support behind the Federal Reserve in a lawsuit that could have
The Bank Policy Institute, the American Bankers Association, the Consumer Bankers Association and the Independent Community Bankers of America all filed motions in support of the Fed in its ongoing
"Both as a matter of law and sound public policy, reserve banks have discretion to grant or deny a master account. This discretion is no accident," wrote BPI and The Clearing House, which operates the Real Time Payments, or RTP, network. "It reflects Congress's recognition that master account holders receive several important privileges and … can serve as a risk transmission channel to the Reserve Banks and other participants in the payment system."
Earlier this year, a U.S. district court judge
Custodia is now
As of this month, the case has been fully briefed by both sides and their supporting filers. A court date has not yet been set, but oral arguments are expected to be delivered sometime before the end of the year.
Fundamentally, Custodia claims the district court
"Congress made a deliberate, unambiguous decision to rescind [the Fed's] discretion in the MCA and make certain covered services mandatory," Custodia wrote. "The Fed, courts, and commentators all agreed at the time — and in the subsequent three decades — that the MCA's equal access mandate was broad, applying to all eligible depository institutions."
But banking groups see the matter differently. While the trades avoided commenting on Custodia's master account bid directly, they argued that it was important for the Fed to safeguard its systems against risks and endorsed the Fed's three-tiered system for assessing applications — the framework gives federally supervised and insured depositories the easiest path to approval, while applying the most scrutiny to state-chartered institutions without insurance.
"Federally insured and regulated banks … are subject to a streamlined application process because the comprehensive, ongoing, and in some cases continuous federal regulation and oversight to which they are subject gives the Fed assurance that they will not compromise the safety or integrity of the federal banking system," the ABA, CBA and ICBA wrote in a joint filing. "But with novel institutions like Custodia, the Fed has no such assurance, and its Reserve Banks must therefore be able to carefully scrutinize such institutions' business models, along with their underlying soundness, safety, and security, before effectively giving them the keys to the palace that is our banking system."
Even the digital bank's home state banking group, the Wyoming Bankers Association, put its support behind the Fed. It praised the "vast overlapping web of federal laws, regulation, and oversight by federal prudential regulators" as necessary safeguards for the country's banking system.
The trade group argued that reserve banks have "statutory discretion" over master account access and aren't obligated to "automatically and unconditionally grant such access" to all chartered depositories.
"The statutes in question here are unambiguous and preserve this discretion, and the integrity and soundness of the federal banking system's payment services would be compromised and undermined if Custodia's arguments are accepted," the WBA wrote.
Much of Custodia's argument hinges on a single word: "shall." A provision of the Monetary Control Act — a law aimed at bolstering the Fed's ability to transmit its monetary policy — states that Fed services "shall be available to nonmember depository institutions." The bank interprets that statute as guaranteeing all banks, including those that are not members of the Federal Reserve System, equal standing.
Custodia's view is backed by digital asset groups, including the Digital Chamber, the Global Blockchain Business Council and the Blockchain Association, all of which filed supportive briefs. Also weighing in on Custodia's behalf were the libertarian advocacy group Americans for Prosperity Foundation and several Republicans on the Senate Banking Committee and House Financial Services Committee.
Custodia's supporters include some strange political bedfellows, including former Obama solicitor general Don Verrilli — who called the Fed's actions related to Custodia "an ill-conceived form of protectionism" — and former George W. Bush solicitor general Paul Clement, who said the lower court's decision amounted to a "grant of unlimited discretion" to the Kansas City Fed.
Verrilli authored a brief on behalf of Blockchain Association. Clement — who served as chief litigator for Loper Bright Enterprises in its Supreme Court victory against the U.S. Department of Commerce, ushering in
The state of Wyoming also filed a brief defending its Special Purpose Depository Institution, or SPDI, program. The charter is aimed at providing a limited banking license to banks dealing with cryptocurrencies. It prohibits holders from issuing loans and requires them to maintain 100% backing of customer deposits. The Fed's denial of Custodia's application called into question the state's ability to oversee risks as effectively as federal banking regulators.
"The state has established a detailed and extensive process that ensures the SPDI banks are well-regulated with built-in oversight processes," the state's attorneys wrote.
