Digital asset bank sues over access to Federal Reserve


CHEYENNE — A local company that calls itself a digital asset bank sued the nation’s central bank over its delay in approving an application to set up a master account with the Federal Reserve. Such an account could make it easier and cheaper to do business.

The Cheyenne-based company is now called Custodia Bank and went by the name Avanti Bank and Trust when it was founded in 2020 by Caitlin Long. For about 19 months, it has been seeking to get a Fed master account so that it can directly access the central bank without going through a third-party intermediary financial institution.

“Through this lawsuit, Custodia seeks to ensure that its Federal Reserve master account application receives the fair dealing and due process guaranteed to it by both federal statute and the U.S. Constitution,” wrote a spokesperson. “Custodia has satisfied every rule applicable to it, and has gone beyond by applying to become a Fed member bank.”

Custodia declined further comment on the record.

This is one of many cryptocurrency-related companies with a link to Wyoming. None of the members of the state’s congressional delegation would comment.

In a separate move, crypto fan Sen. Cynthia Lummis, R-Wyo., said Tuesday she introduced new legislation with a Democratic senator that they said would make it easier to start new crypto products while also protecting consumers. “Wyoming has gone to great lengths to lead the nation in digital asset regulation, and I want to bring that success to the federal level,” Lummis said in a statement.

Custodia filed suit Tuesday in U.S. District Court in Wyoming against the Fed’s board of governors and the Kansas City Fed. Just like Lummis, the company pointed to Wyoming’s efforts to lure crypto operations. It contends such actions are being stymied by Fed inaction.

The bank called “its chartering state of Wyoming a nationwide leader in developing charters tailored for banking in the digital asset industry.” Such “efforts, however, are stalemated by Defendants’ unexplained and indefensible refusal to act upon Custodia’s application,” the company alleged.

The legal complaint asked the court to require the central bank to “promptly provide a decision on the application and articulate the reasons for the decision” and “the standards.”

Custodia alleged that the Fed’s process has been secretive and has the effect of benefiting incumbent financial institutions, some of which are represented by the Kansas City Fed’s board. The delay “eliminates much of the competitive benefit that Custodia would enjoy from using the charter that Wyoming granted it, thus benefiting existing and entrenched competitors and ignoring Wyoming’s sovereignty as a state.”

The Fed in Washington declined to comment on the record. The Kansas City Fed simply declined to comment.

“Direct access to the Federal Reserve is vital to Custodia’s ability to operate effectively and efficiently in pursuit of its core mission to offer a secure, compliant bridge between digital assets and the United States dollar payment system,” the lawsuit stated. It noted that the bank already passed “intense review and (satisfied) stringent regulatory requirements imposed by its chartering state of Wyoming.”

When legislation was approved in 2020 establishing Wyoming-chartered special purpose depository institutions (SPDI) to provide banking services involving digital assets, proponents envisioned the state becoming a crypto financial hub.

Things have not necessarily worked out.

Part of this is due to delays, including by the Kansas City Fed in approving master accounts for two of the state’s first SPDIs, Kraken Bank and Custodia. Kraken had no comment Tuesday.

The situation has stakeholders concerned this is holding back Wyoming’s crypto industry, according to recent interviews with Wyoming Business Report, a sister publication of the Wyoming Tribune Eagle.

A bright spot in Wyoming has been its own government, in the view of crypto advocates. They say this state acts much more quickly than the federal government.

In July 2020, the company then called Avanti Financial announced the Wyoming Division of Banking had deemed its application for a bank charter as complete, “and that its application timeline has been accelerated.”

Late that October, the Wyoming State Banking Board approved a SPDI charter for Custodia without any conditions, Wyoming Division of Banking Commissioner Jeremiah Bishop wrote to the WTE Tuesday. His email noted that this board is the entity that ultimately approves such SPDI charters.

His agency remains “involved in reviewing and investigating” such a charter application, the official added. “Wyoming law imposes statutory deadlines on the Wyoming Division of Banking’s time to review and investigate the official charter application. In this case, the Wyoming Division of Banking had enough time to review and investigate Custodia Bank’s official application for approximately three-and-a-half months.”

In Congress on Tuesday, the Responsible Financial Innovation Act was introduced by Lummis and Sen. Kirsten Gillibrand, D-N.Y.

A news release called it “landmark bipartisan legislation that will create a complete regulatory framework for digital assets.”

If passed by both chambers of Congress and signed into law by President Joe Biden, the bill would create “regulatory clarity for agencies charged with supervising digital asset markets,” with “a strong, tailored regulatory framework for stablecoins,” Lummis said.

Although Custodia’s suit does not mention the word stablecoin, its service could have aspects of such a digital currency.

Instead of acting like what its lawsuit called a “traditional bank,” SPDIs such as this crypto company would not make loans with customer deposits. Custodia would instead let customers use their virtual money, such as bitcoin, to make a purchase, but without having to convert the underlying crypto cash into U.S. dollars.

Earlier this year, Wyoming came close to having the go-ahead to create its own stable virtual currency. Then, Gov. Mark Gordon vetoed the legislation. Should a similar bill pass next year and get the gubernatorial nod, Wyoming could still become the first state with its own stable coin.

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