Regional Federal Reserve banks have the right to block banks from accessing their financial services, a federal judge in Wyoming ruled last week.
U.S. District Court Judge Scott Skavdahl ruled against Custodia Bank in its lawsuit against the Federal Reserve Bank of Kansas City and the Federal Reserve Board. The Cheyenne-based digital asset bank had sued the institutions for
The decision caps a nearly two-year-long
“Challenging the Fed’s strong-arm tactics has always been an uphill battle, but Custodia Bank remains committed to our vision of creating a safe, tech-enabled bank,” said Custodia spokesman Nathan Miller in a written statement. “We are reviewing the court’s decision and all of our options, including appeal.”
Skavdahl’s decision, which was issued Friday, struck down
“The court concludes the statutory language is clear and unambiguous, and the Federal Reserve Act does not support Custodia’s position for several reasons,” Skavdahl wrote.
One of the reasons cited in the decision was an amendment to the
This interpretation of the amendment drew swift rebuke from some in Washington, including the provision’s author,
“Knowing that they did, in fact, approve some, deny others, sometimes reverse themselves as they did in the case of an applicant from Colorado, I simply wanted them to be required to disclose this,” Toomey said. “For someone to come along and say the disclosure means you approve of and condone the practice is so illogical. It is a willful refusal to read the English language as it’s written.”
Toomey, who left Congress at the end of 2022 after choosing not to seek reelection, also noted that Skavdahl’s view on this subject has changed materially since last June. After the Fed cited the provision in a motion to dismiss the case, the judge wrote that the amendment “cannot be read as Congress’ imprimatur on Federal Reserve Banks holding carte blanche to grant or deny master account applications.”
Last week, the judge wrote that the amendment “confirms that Federal Reserve banks may ‘reject’ applications from depository institutions.” He provided no explanation for the shift in interpretation.
“It’s nothing less than baffling,” Toomey said. “The judge does a complete and absolute 180-degree reversal on his own interpretation of this language with no explanation. How does that happen?”
Last year, former Toomey staffers told American Banker they were
The former Toomey staffers, who were granted anonymity because they still work on Capitol Hill and interact with the Fed, said staffers from the central bank insisted on certain language that was later cited by Fed lawyers in a
“They certainly know what our intent was. They know what we were trying to accomplish. They were consulted extensively and had very strong feelings about what the language should say, and then they turn around and go to court and argue that it means something wildly different from what they know, it actually was intended to mean,” Toomey said. “You can draw your own conclusions, but that’s the fact pattern.”
The ruling is the latest in
In February, the New York Fed
The Custodia decision has already established a precedent for other master account disputes. In a decision issued Saturday, Judge Raymond Patricco of the U.S. District Court for the District of Idaho, dismissed PayServices Bank’s case against the San Francisco Fed, citing the Custodia ruling in his conclusion that reserve banks have the discretion to deny master account applicants.
For both the Custodia and PayServices decisions, the presiding judges drew from another recent court case involving a master account dispute — the Guaynabo, Puerto Rico-based
Lawyers for Banco San Juan Internacional declined to comment on the recent rulings. Lawyers listed as representing PayServices could not immediately be reached for comment.