State, Lummis and Blockchain Association file briefs supporting Custodia

Defendants were required to respond to the request for summary judgment by the third week of February. A bench trial is scheduled the April 8. If the U.S. District Court supports Custodia’s request for a summary judgment, no trial would be held, and the Fed and Kansas City Fed would be ordered to issue the master account.

Much of Custodia’s arguments for a summary judgment and the amicus briefs rely on information uncovered in evidentiary discovery for the April trial which indicated that staff at the Fed rewrote the initial recommendation by the Kansas City Fed to approve the master account. In denying the master account, the Fed cast doubt on the qualifications of Custodia Bank officers, the bank’s financial status, and the ability of Wyoming to properly regulate financial institutions that serve as custodians for digital assets.

Seeking to uphold its right to approve and regulate state-chartered banks, particularly special purpose depository institutions (SPDIs), the Wyoming Attorney General’s Office filed an amicus brief in Custodia Bank’s motion for a summary judgment. Master accounts provide access to Federal Reserve payment and settlement systems.

U.S. Sen. Cynthia Lummis of Wyoming and Rep. Warren E. Davidson of Ohio filed an amicus brief that declared the actions by the Fed violated regulations set forth in Section 342 of the 1980 Monetary Control Act, which had its origins in the Federal Reserve Act of 1917, establishing the dual banking system and eligibility of state regulated banks to participate in the Federal Reserve system. The Fed had argued it had discretion in determining eligibility for a master account, but Lummis’s amicus brief, prepared by her office’s general counsel, Chris Land, stated that the intent of Congress and court interpretation of the law doesn’t grant such discretion.

“The current litigating position of the Board and Reserve Bank is not consistent with past statements and practice, and undercuts their stated commitment to provide payment services ‘in an atmosphere of competitive fairness,’” stated the amicus brief. “This matter is not about crypto assets, but fidelity to Congress’ enactments and the dual banking system.”

The brief also pointed to recent revelations by the Fed that it had approved 26 uninsured, non-federally regulated master account applicants in its recent quarterly update.

“While the Federal Reserve may have a laudable public position on equality of access to the payments system, this matter shows that the Federal Reserve System has miles to go in following the law,” the brief concluded.

“The Federal Reserve’s inaction in issuing master accounts is unacceptable. The Fed cannot keep ignoring the clear laws enacted by Congress,” Lummis said after filing the amicus brief. “It is time for transparency and consistency from the Fed, not more excuses.”

The amicus brief by the state maintains that Wyoming has an interest in the Custodia lawsuit because Custodia is a Wyoming-chartered SPDI bank. The state helped develop the SPDI charter and regulatory framework in conjunction with the Kansas City Fed. Wyoming asserts the defendants’ reasoning for denying Custodia appears to reflect a broader bias against Wyoming’s SPDIs that could nullify the state’s ability to charter innovative state banks.

“While the State does not seek to vindicate Custodia’s individual interests, it instead speaks in favor of its regulatory banking regime and the United States’ dual banking system to provide the Court with additional insight in analyzing Plaintiff’s arguments,” the brief states.

The brief argues that the Fed’s focus on purported shortcomings of Wyoming’s SPDI laws and skepticism of state resolution processes indicate an animus toward Wyoming-chartered banks that could prejudice future SPDI applicants. Wyoming has a sovereign interest in regulating banking within its borders under the U.S. dual banking system. The state also has a pecuniary interest in chartering and regulating SPDIs.

Wyoming contends equality between state and federally-chartered banks is firmly established in law and that federal policy seeks to ensure competitive equality between state and national banks. Yet the Fed’s conduct undermines Wyoming’s regulatory authority and competitive standing, the brief states.

The brief alleges the defendants tied cryptocurrency risks to Wyoming SPDIs specifically, rather than judging Custodia’s application on its own merits.

“Plaintiff’s use of the SPDI charter should not impact whether it receives a master account; instead, it should be judged according to its own merits and the legal constraints on Defendants during the master account application review process,” the brief reads. “Rather than apply a logical method based on Plaintiff’s actual plan of operation, or even a true assessment of the risks and features of SPDIs, the Defendants appear to have applied an automatic and tenuous heuristic in settling on their decision to deny the Plaintiff’s application.”

Wyoming chartered SPDIs, utilizing innovative financial and banking markets, should not be penalized reflexively for doing so, the state asserts.

According to the brief, “the State of Wyoming has, thus far in vain, tried to comply with all the requirements” that the Fed and Kansas City Fed have put out in creating SPDI charters, and yet they still have not granted master accounts for any SPDIs.

“In conclusion, Wyoming requests the court consider its regulatory position and interest in chartering banks under the dual banking system,” the brief reads. “The state asserts Custodia should have been evaluated based on its actual business plan and operations, not rejected out of hand due to its SPDI charter. Wyoming argues its careful SPDI framework should not be nullified without adequate justification.”

The amicus brief is the latest effort led by state Attorney General Bridget Hill to defend the legitimacy and viability of Wyoming’s statutory framework involving SPDIs. In April 2023, the state sought to intervene in Custodia’s lawsuit against the Fed. But U.S. District Judge Kelly H. Rankin denied the attempt, saying its involvement would unnecessarily complicate proceedings.

Rankin also said that, at the time, the state failed to offer a valid claim for relief. He said as the state had already filed an amicus brief in Custodia’s lawsuit, it may supplement or file an amended amicus brief addressing new issues it argues it has an interest in.

Custodia’s position is also supported in an amicus brief filed by the Blockchain Association and payment systems scholars. The brief was critical of Fed risk assessment considerations that prevent innovation.

“The Federal Reserve Board’s newfound risk-assessment responsibility as part of the master account process not only undermines the important role Wyoming’s innovative SPDI system plays, but it also stymies state innovation outside the crypto industry,” the brief states. “And because states have been laboratories of innovation, impeding states’ progress will, in turn, impede federal innovation, and ultimately restrict America’s future competitiveness in the global financial services industry.”

The Blockchain Association brief is similar to both the state of Wyoming’s and Sen. Lummis’s briefs in its criticism of the Fed.

“Creating a new layer of federal administrative oversight to second-guess and effectively override state charter risk assessment is inconsistent with the dual banking system and undermines states’ roles as laboratories of financial innovation,” the brief state. “It also conflicts with Congress’s intent to maintain the integrity and strength of the dual banking system.”