DWT attorneys recently filed an amicus brief on behalf of the co-chairs of the Wyoming Select Committee on Blockchain Technology in support of the application of Custodia Bank (which is a Special Purpose Depository Institution under Wyoming law) for a master account to be issued by the Federal Reserve Bank of Kansas City.
Such an account would give Custodia access to the Fed's payment systems including ACH and Fedwire. Most Master Account applications are approved within a couple of weeks, and the application form itself indicates that approval usually takes 5 to 7 days. In this case, however, 22 months have elapsed with no end in sight.
Custodia sued the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City in June. Both defendants filed Motions to Dismiss, focused primarily on procedural arguments challenging the court’s ability to grant Custodia relief at this time.
Neither defendant addressed the detailed legislative and regulatory requirements developed by the Wyoming Legislature and the Wyoming Division of Banking to ensure the safety and soundness of SPDIs. In our amicus brief, we addressed many of these, demonstrating to the court that the Wyoming system assures that SPDIs like Custodia pose little or no risk to the Fed’s payment systems.
SPDIs are, for example, governed by exam manuals in excess of 770 pages. The SPDI framework fully covers the quality of reserves, information security, cyber security, asset volatility, capital, liquidity, and balance sheet strength. And SPDIs are required to maintain reserves of at least 100% of the amount of deposits. All of these requirements were developed in a collaborative process stretching back to 2018—a process in which the Board and the Kansas City Fed participated. And each charter applicant must undergo scrutiny from the Division of Banking and in a public hearing before it receives a charter. This is fully consistent with regulatory calls at the federal level for extensive protections to ensure safety and soundness across the board.
As we explain in the brief, the resulting structure provides four levels of protection for SPDIs, their customers, and the defendants — legislation, regulation, examinations, and internal controls. Moreover, the regulatory structure emphasizes the need for ongoing testing and continual adoption of best practices. Given the involvement of the defendants in the development of this structure, their familiarity with its details, and lengthy period the application has been pending, the Kansas City Fed’s delay and failure to decide is, we argue, unreasonable under the Administrative Procedure Act.