On June 7, 2022, Custodia Bank ("Custodia") filed a complaint in the U.S. District Court for the District of Wyoming against the Federal Reserve Board of Governors (the "Board") and the Federal Reserve Bank of Kansas City (the "Kansas City Fed"). Custodia is a Wyoming-based Special Purpose Depository Institution ("SPDI"), a new form of bank charter created by the Wyoming Legislature which enables SPDI's to perform limited services in connection with providing custody services for digital assets such as Bitcoin and allowing a Custodia customer to use a cryptocurrency like Bitcoin "to make a direct transfer, a purchase, or an investment, rather than having to first convert the" cryptocurrency into U.S. Dollars. In its lawsuit, Custodia seeks to compel action on its application for a Federal Reserve master account which would provide access to the Board's account services, including access to FedWire, the Federal Reserve's payment system. Without the ability to move large sums of money over the FedWire network, it would be nearly impossible for any bank to serve institutional customers. In Custodia's case, not having access to FedWire would make its digital asset business model unsustainable. The Board and Kansas City Fed jointly moved to dismiss Custodia's complaint. A number of amici filed briefs. Davis Wright Tremaine represented one of the amici, the Co-Chairs of the Bipartisan Blockchain Committee of the Wyoming Legislature, in support of Custodia and in opposition to the defendants' motion to dismiss (DWT amicus brief available here).

The Court's opinion denying the motion to dismiss on four of Custodia's more important claims was broadly favorable to Custodia. Specifically, Custodia's claims, under the Administrative Procedure Act and the Due Process Clause, that the defendants unreasonably delayed processing Custodia's application for a master account will move forward. The Court noted that a series of factual issues – primarily regarding whether the Board interfered with the Kansas City Fed's decision-making process in connection with the grant or denial of Custodia's master account application – must be resolved before being able to rule on those claims. The Court also did not dismiss claims that Custodia may be able to compel the grant of a master account and its mandamus claim seeking to compel action from defendants. Custodia's request for declaratory relief based on defendants' unreasonable delay in acting on the master account application was also maintained. Finally, the Court ruled that these claims were both ripe and justiciable.

Among details Judge Skavdahl cited in support of his finding it reasonable to infer the Board and Kansas City Fed have been involved in some manner in interfering with or delaying Custodia's application: the Kansas City Fed had allegedly confirmed Custodia's account eligibility in early 2021 and told Custodia around this time that there were "no showstoppers" with its master account application. In addition, "FRBKC then informed Custodia in March 2022 that it had not even started processing the master account application (which may or may not have occurred due to the Board of Governors' involvement)." He then noted that "[c]onsidered together," "the Court has little difficulty concluding Custodia has asserted a plausible cause of action for unreasonable delay against both Defendants."

The Court did dismiss a claim based on the Appointments Clause, finding that the President of the Kansas City Fed was an "inferior officer" subject to supervision by the Board and, therefore, was serving consistent with the Appointments Clause. The Court also dismissed a claim based on the Separation of Powers Doctrine, finding that the grant or denial of a master account application was not a "legislative act" covered by the Doctrine. It also dismissed a due process/fundamental unfairness claim that the application decision was made by interested parties (since competitors of Custodia serve as members of the Board of the Kansas City Fed). Finally, it also rejected as unripe two alternate claims for mandamus and a declaratory judgment in the event Custodia's application is denied.

The result is quite positive for Custodia. We believe this is the first case in which claims seeking to compel the grant of a master account have proceeded beyond the motion to dismiss stage. The Court's emphasis on the importance of developing the factual record should significantly benefit Custodia as defendants' delay appears excessive on its face. Master account applications are generally granted in five to seven business days, as stated on the application form, but Custodia's has been pending for more than two years. In our amicus brief, we explained at length how the Wyoming statutory and regulatory structure is designed to protect both the defendants and Custodia's customers from risk. We also emphasized the existence of numerous factual issues, and the inexplicable nature of the defendants' delays. While we expect the discovery could be extensive, the judge should place it on an expedited schedule (to mitigate the impact of further unreasonable delay) so that the merits can be reached in early 2023.

In the wake of the FTX debacle, and the apparent utter lack of internal governance, it also is important to note the depth and rigor of the Wyoming statutory architecture and its regulatory implementation. As we noted in the amicus brief, it consists of four levels — (1) the statute, (2) the regulations, (3) the extensive (772 pages) examination manuals, and (4) the internal controls that are the product of the first three. Moreover, far from the "let's skip the due diligence" approach that has led to so much damage, Wyoming requires an extensive application process and a public hearing before a charter can be granted. While defendants avoided discussing these requirements in their briefs, one does not need to wait for a thorough regulatory structure to be built — this has already been built by the Wyoming Legislature and Division of Banking with assistance from experts in Wyoming, across the nation, and even around the globe. We do not have to wait for the creation of comprehensive, crypto regulation that effectively mitigates risk. If one simply goes to the site of the Wyoming Division of Banking, the SPDI statute, regulation, guidance, rules and detailed examination manuals are easy to access. To its credit, Wyoming has done the heavy lifting in building a robust and responsible regulatory architecture which can serve as a regulatory foundation across the broad intersection of digital assets and banking.