Wyoming AG Says State’s Authority At Stake In Custodia Bank Case

Wyoming is going to try again to add some of its muscle to the David-and-Goliath battle between Custodia Bank and the Federal Reserve. The state is trying again to file a brief in the Custodia Bank lawsuit showing a fair and impartial process for Custodia was usurped by politics.

Renée Jean

January 18, 20247 min read

Caitlin Long is CEO of Wyoming-based Custodia Bank.
Caitlin Long is CEO of Wyoming-based Custodia Bank. (Caitlin Long via Facebook)

Wyoming is going to try again to add some of its muscle to the David-and-Goliath battle between Custodia Bank and the Federal Reserve.

Wyoming filed a motion Wednesday asking a federal judge for a second time permission to file an amicus brief in the case that Custodia filed against the regulatory agency after it rejected the small Wyoming bank’s application for a master account.

A master account is like a bank account for banks. It’s part of a suite of services the Federal Reserve typically offers to banks large and small, whether chartered federally or through their states.

Custodia has argued that it was held to a much higher standard than other state-chartered banks, and that it’s being unfairly shut out of the Federal Reserve system.

Wyoming’s brief stresses that the state is not vindicating any of Custodia’s claims or personal interests. Rather, it is taking issue with the Federal Reserve’s “marked disdain and disparagement” of Wyoming banking laws, as well as what the state sees as an infringement on its regulatory authority.

“Defendants’ internal correspondence, uncovered during discovery, makes clear that they saw Plaintiff’s request for a master account as being precedential for all Special Purpose Depository Institutions,” Wyoming’s proposed brief states. “This revelation confirms the state’s existing concern that the Defendants’ overwhelming bias against state-chartered banks, and those chartered by Wyoming particularly, makes any Wyoming-issued SPDI charter irrelevant.

“Even though it is carefully crafted, the state’s regulatory banking regime for all SPDIs is essentially nullified by the defendants’ posture and actions taken in this appeal.”

Discovery Suggests Politics Played A Role

Wyoming so far has four state-chartered SPDIs, none of which have so far gained a Federal Reserve master account.

Custodia Bank is the only one, so far, to sue over the Federal Reserve’s handling of Wyoming’s new digital asset banking laws.

In its most recent motion, Custodia has asked for summary judgement based on evidence it’s uncovered during discovery. If granted, this would be something of a jugular strike in the case. A summary judgement asks a judge to rule that the evidence in the case is so clear and compelling, a trial isn’t needed.

Among the evidence Custodia presented as part of that motion are what the company says are clear indications that politics usurped what is supposed to be a fair and impartial process.

Among the most egregious examples cited by Custodia were instances where federal regulators simply reversed the Kansas City Fed’s determinations, rewriting them to the complete opposite, without any supporting documentation to support such radical changes.

For example, the Kansas City Fed’s conclusion that Custodia Bank had “strong” risk management was changed instead to “significant risk management gaps,” while “liquidity risk is relatively low” became insufficient “liquidity risk management processes.”

Among the more irksome of the edits for Custodia Bank were those changing Custodia management experience from “impressive” and “extensive” to “lack of collective depth and relevant banking experience.”

Custodia Bank’s CEO Caitlin Long is a 20-year veteran of Wall Street, working for such companies as Morgan Stanley. While employed by Morgan Stanley, she was tapped to investigate the future of bitcoin.

But Long isn’t the only one with both banking and digital asset experience at Custodia Bank. Long has previously told Cowboy State Daily that all of the senior management staff have decades of relevant experience.

The bank is also advised by Katie Cox, who retired as a bank examiner with the Federal Reserve after a 32-year career.

Cox has cited what she called 23 irregularities in the Federal Reserve’s handling of Custodia Bank’s master account application.

Second Try For Bite At The Apple

The judge on the case, Chief Judge Scott Skavdahl, has perviously rejected a motion to intervene in the case from Wyoming, saying it would change the character of the case too much.

Wyoming’s latest attempt to influence the case by filing a brief is based on the new evidence Custodia has found through discovery, suggesting that politics interfered with a fair and impartial process.

Wyoming’s chief concern, as outlined in its brief to the court, is that the case is going to be precedential for all future Special Purpose Depository Institutions.

As evidence, Wyoming Attorney General Bridget Hill and her staff cite several of the statements the Federal Reserve wrote in its 86-page order denying Custodia Bank’s master account.

“While (those were) directed toward Plaintiff’s individual application, each of the foregoing statements are equally true about every potential Wyoming SPDI which may come into existence,” the brief states. “Each of those statements demonstrate the Kansas City Fed’s disdain for and disparagement of Wyoming’s statutory and regulatory banking regime.”

Those statements also come after Wyoming had more than 100 meetings with the Kansas City Fed to develop a framework for SPDIs that would meet with the Federal Reserve’s approval.

Lawmakers even went so far as to take out a clause in the law — at the Kansas City Fed’s urging — that would have required Wyoming’s attorney general to file suit to uphold Wyoming’s digital asset laws.

Lawmakers have told Cowboy State Daily they were told the Federal Reserve had no plans of blocking Wyoming SPDIs.

Usurping Wyoming Banking Authority

Wyoming has a vested interest in ensuring that its bank chartering role is upheld under the longstanding dual-banking system, the brief goes on to state.

Having a framework for digital asset banks, particularly one in which the Kansas City Federal Reserve Bank played such an extensive role in helping to develop, shouldn’t automatically mean exclusion from the federal reserve system.

That is usurping Wyoming’s role in the regulation of its state-chartered banks.

“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,” Hill states in the brief. “In sum, Wyoming chartered SPDIs, utilizing innovative financial and banking markets, should not be penalized reflexively for doing so. Rather, those entities should instead be subject to an appropriate level of scrutiny free from bias against the structure of the dual banking system.”

The dual banking system is already firmly embedded in statutes that govern the nation’s banking system, Wyoming’s brief added, with multiple presidential decisions confirming that stance.

“Wyoming has, thus far in vain, tried to comply with all the requirements that the Defendants have put out in creating SPDI charters,” Wyoming’s brief concludes. “Yet the defendants still have not been granted master accounts for any SPDIs. Wyoming respectfully requests that the court consider this Tate’s regulatory position in analyzing plaintiffs’ (summary) motion for judgement as a matter of law.”

Renée Jean can be reached at renee@cowboystatedaily.com.

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Renée Jean

Business and Tourism Reporter