A group of US lawmakers led by Senator Cynthia Lummis is backing the lawsuit presented by Custodia Bank against the Federal Reserve for its delay in responding to the institution’s application for a master account at the central bank.
The legislators reportedly sent an amicus brief to the Wyoming court that is currently handling the cause to prevent it from dismissing the complaint as the Fed has violated the provisions contained in the Monetary Control Act of 1980, CoinDesk first reported.
According to the letter sent to the court, the Federal Reserve is effectively discriminating Custodia as it has not responded to its application within the maximum period established in the law.
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“The Board [of Governors] and the Reserve Bank are not empowered to determine what is – and what is not – a ‘depository institution’ under the existing statutory scheme”, the brief stated.
“It is not conceivable that the Board or the Reserve Bank should have the authority to essentially determine what depository institutions are ‘real depository institutions’ and which are not”, the legislators further argued.
The group of legislators who supported the document includes three members of the Senate’s Banking Committee and four members of the House Financial Services Committee.
In response to the crypto firm’s legal claim, the Fed stated that it needed more time to assess the impact of allowing the firm to participate in its payment system.
The Fed’s “Standardless” Application Process Fosters Government-in-Secrecy Approach
The situation has been aggravated by the fact that the process to apply for a master account with the Fed is considered “standardless” by Custodia, meaning that there are no clear rules that allow the firm to secure the approval of its application.
The crypto bank accuses the Fed of acting in “complete secrecy” and without accountability for its decision-making process. Custodia claims that the Fed is, de-facto, functioning as the entity that approves what is a bank and what is not as opening a master account at the central bank is essential for any financial institution to conduct its regular business.
By June this year, the Fed had taken 19 months to respond to Custodia’s application for said account. That is 7 months longer than the maximum period established in the law for the central bank to make a decision.
This delay has hurt Custodia’s business as a master account would allow it to cut costs, introduce new products and services, and provide a more secure environment for its customers to make transactions in US dollars.
In August this year, the Federal Reserve provided more clarity on the process that banks and depository institutions would have to follow to apply for a master account at a Federal Reserve Bank (FRB).
According to the Fed’s new guidelines, “novel charters” such as Custodia Bank would receive “the strictest level of review” from the Federal Reserve Board. That said, the Fed commented that all FRBs must “ensure that the guidelines are implemented in a consistent and timely manner”.
This update from the central bank appears to have been issued amid growing demand for master accounts at FRBs by what they call novel charters. However, it does little to accelerate the application for what are now deemed as “Tier 3” institutions, which are non-federally-insured institutions.
Custodia Holds a State Bank Charter and Can Lawfully Apply to a Master Account
Custodia Bank holds a state charter in Wyoming as a Special Purpose Depository Institution (SPDI). According to the company’s website, these entities are considered actual banks under both state and federal law. Hence, the Federal Reserve is obligated to process their application for a master account and respond accordingly.
The institution has been recognized by the Federal Reserve of Kansas City and the American Bankers Association (ABA) as a depository institution.
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