Caitlin Long's Crypto Bank Custodia Sues Fed Over 'Master Account' Delays

Custodia, the crypto bank founded by former Morgan Stanley managing director Caitlin Long, today sued the Federal Reserve for what it claims has been a "patently unlawful delay" in reviewing the bank’s application for a master account. 

Custodia, formerly known as Avanti, is one of a select number of businesses permitted under a Wyoming law to become Special Purpose Depository Institutions (SPDI), capable of conducting both crypto transactions and traditional banking services.

However, crypto-friendly Wyoming’s authority only reaches so far: for a bank to wield such power, it needs a "master account" at the Federal Reserve.

All federally-chartered banks possess a master account, which allows for direct payments with and access to the Fed. Custodia applied to the Federal Reserve Bank of Kansas City for a master account 19 months ago.

According to the lawsuit, they still haven’t heard back. 

The lawsuit, filed against the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City, claims that this delay has violated a one-year statutory deadline for approving such applications. In fact, the Fed’s application paperwork for a master account cites a typical turnaround time of five to seven business days.

Custodia applied for their master account just after receiving their Wyoming bank charter in October 2020. Per the lawsuit, a representative of the Kansas City Fed then informed Custodia in early 2021 that the application was complete and featured "no showstoppers."

And yet, for Custodia, no decision came for all of 2021.

Federal Reserve Chairman Jerome Powell testified during a Senate hearing in January that the abnormal delay in processing Custodia’s master account application — as well as that of Kraken, the San Francisco-based crypto exchange — was due to the "hugely precedential" nature of granting crypto companies traditional banking powers. 

At that same hearing, Senator Cynthia Lummis (R-WY) argued such a tactic amounted to "deny by delay" and aimed to "starv[e] the applicants until they die."

Notably, Custodia’s application has also not been denied. Powell testified in January that there were "good arguments" for granting Custodia or Kraken a master account. And as recently as March 22, according to the lawsuit, a representative of the Kansas City Fed re-confirmed to Custodia that the company was “legally eligible for a master account.”

Custodia charges fed with delays

Custodia’s lawsuit today alleges that the Fed’s failure to act has cost the company greatly, requiring it to launch with a correspondent bank that possesses its own master account. Such an arrangement, according to Custodia’s attorneys, “eliminates much of the competitive benefit that Custodia would enjoy from using the charter that Wyoming granted it.”

The Kansas City Fed did not immediately respond to a request for comment on this story.

If Custodia’s application for a master account were to be approved, it would mark a major milestone in the integration of crypto into the American economy.

Crypto businesses would be able to provide a suite of services offered by traditional banks to traditional businesses. The bank would also be able to provide simultaneous settlement of trades between digital assets and the dollar. 

Today’s suit requests the U.S. District Court for the District of Wyoming to intervene and compel the Fed to make a decision on Custodia’s application in the next thirty days.

The implications of the suit, and of the Fed’s impending decision, were not lost on the broader crypto community. As Charles Hoskinson, co-founder of the Cardano blockchain, tweeted this afternoon: