Custodia Bank files appeal over decision supporting Fed denial of master account

DENVER — Cheyenne's Custodia Bank is appealing a decision supporting the denial of a master account by the Federal Reserve Board to the 10th Circuit U.S. Court of Appeals.

Custodia's appeal, filed Wednesday, challenges the March decision by Wyoming U.S. District Court Judge Scott Skavdahl, who ruled that the Federal Reserve Banks have the power to deny master accounts to state-chartered banks.

The appeal brief argues that Custodia — a special purpose depository institution (SPDI) founded under Wyoming law to cover cryptocurrency and other digital assets — was wrongfully denied a Fed master account, and asks the appeals court to instruct the district court to rescind its denial and grant Custodia a master account.

In his ruling, Skavdahl argued that denying the Fed such sweeping powers might lead to a "'race to the bottom' among states and politicians to attract business by reducing state chartering burdens through lax legislation."

Custodia's appeal brief quotes Federal Reserve Bank of Kansas City President Esther George to argue why the district court's "race to the bottom" concern is wrong. According to the appeal, "President Esther L. George rejected the claim that providing banks a choice of regulator reduces bank safety and soundness and the stability of the financial system by creating a 'race to the bottom.'"

"I have never seen this among the bank regulators in my 30 years at the Federal Reserve," the appeal quotes George as saying.

How Skavdahl's ruling impacts the dual banking system is identified in the appeal brief. The brief contends the Fed's "assertion of power to deny state-chartered banks master accounts after second-guessing the state-charter's risk assessment is antithetical to the dual banking system."

The brief challenges the Fed's "newly asserted power to discriminate against state-chartered banks in issuing master accounts" cannot be squared with the uniform contemporaneous understanding of the federal Monetary Control Act (MCA).

Custodia's brief points to Congress' use of the word "shall" in the MCA, which it argues makes it clear that Federal Reserve Bank services covered by the fee schedule "shall" be "available to non-member depository institution." It refers to a recent U.S. Supreme Court action that says "the use of the word 'shall' 'creates an obligation impervious to discretion.'"

Since the March ruling in Custodia's case, the Supreme Court also reiterated the importance and validity of state-chartered banks in the Cantero v. Bank of America decision. The Fed's relegation of state-chartered banks to third-tier status is a direct threat to the nation's dual banking system. Custodia's appeal emphasizes the importance of federalism, including the separation of powers, to protect state-chartered banks from discrimination and federal overreach.

In an interview Thursday, Caitlin Long, CEO and founder of Custodia Bank, said that, in the short time since Skavdahl's ruling, the politics surrounding cryptocurrency have shifted significantly — garnering more bipartisan support.

"Donald Trump has come out on record supporting crypto," Long said. "While, unfortunately, we're seeing the Elizabeth Warren (U.S. senator from Maine) crowd who is in charge of the federal bank regulators, doubling down (on anti-crypto policies). While they're still in power, there's definitely a momentum shift in D.C., where moderate Democrats are not in support of this."

Long alleges that Warren and other "hard-left Democrats" have been prosecuting "Operation Choke 2.0" in an attempt by the federal government to kill the crypto industry by going after the law-abiding companies.

Custodia's case is being handled by veteran Supreme Court attorneys Ian Gershengorn and Michelle Kallen from Jenner & Block. Kallen served as Solicitor General of Virginia, and Gershengorn was Obama's Acting Solicitor General. He supervised government briefings for the Affordable Care Act and same-sex marriage and has argued before the Supreme Court 17 times.