After Wyoming-Based Custodia Bank Denied By Feds, State May Step Into Fight

After Wyoming-based Custodia was denied by the Federal Reserve and federal judges their own master account for its digital bank, Wyoming legislators say they may step into the fight against what they say is political bias against the state.

Renée Jean

May 24, 20248 min read

Caitlin Long, CEO for Wyoming-based Custodia Bank.
Caitlin Long, CEO for Wyoming-based Custodia Bank. (Matt Idler for Cowboy State Daily)

Wyoming might take a page out of the Texas playbook in its ongoing tiff with the Federal Reserve over its innovative digital banks, called Special Purpose Depository Institutions, or SPDI (pronounced “speedy”) banks, by applying for its own master account with the Federal Reserve.

A master account is essentially a bank account for banks, but some governmental entities also have them, Texas among them.

The idea was among recommendations from Custodia Bank CEO Caitlin Long, whose SPDI was denied access to the Federal Reserve through a master account, which it needs to access the Federal Reserve’s various services for banks.

Texas has had a master account of its own since 1996, which saves that state millions of dollars in banking fees annually, Long said. A master account would also help Wyoming with its efforts to develop a stable token, and it could also help avoid a repeat of Operation Chokepoint, Long said.

Operation Chokepoint was a now-discontinued U.S. Department of Justice initiative that critics say placed pressure on banks to close accounts with politically unpopular businesses, like oil and gas companies, payday lenders or gun manufacturers based on the idea that these businesses, though legal, were at higher risk for fraud and money laundering.

That posed serious problems for various Wyoming businesses during the Obama administration, particularly oil and gas companies, Long said.

“During a hearing about the original SPDI bank bill draft in 2019, one of your former House colleagues testified that his business had been de-banked,” Long said. “He voted for the SPDI bank bill to ensure Wyoming had a way to fight back against politicized D.C. bank regulators abusing their power.”

Long said that states and the federal government have long had equal power when it comes to the dual banking system, and that was to prevent just such behavior on the part of a politicized Federal Reserve.

“Frank Mondell, a rancher for Newcastle, warned about the Fed during a 1913 debate about its creation,” Long said. “He said, quote, ‘Not only is its power, authority and control vast, but it is of a character which, in practical operation, will tend to increase and centralize.’ Mondell was spot-on.”

Siphoning Wyoming Wealth To New York

One of the dangers Mondell warned about was how a centralized reserve bank could act to siphon credit and wealth away from the heartland of America to New York and Washington, D.C., Long said.

“That’s why they wanted federalism at the Fed, dispersing power among the 12 separate regional and mostly autonomous Reserve banks,” Long said. “But the 12 Federal Reserve Banks quietly lost that separation and autonomy in 2016. They functionally now share only one balance sheet at the end of the day, controlled by Washington, D.C. — a politicized D.C., I might add.”

Long believes a second Operation Chokepoint is happening with the digital asset industry, adding that FDIC Chair Martin Gruenberg was among architects of the first Operation Chokepoint.

Long said discovery in her lawsuit against the Federal Reserve showed that Federal Reserve officials have quietly applied pressure to Custodia Bank’s partners, forcing them to close Custodia’s accounts on two separate occasions, despite Custodia Bank not having done anything that is unethical or illegal.

“They set us back many, many months,” Long said. “So, the SPDI banks haven’t yet solved the de-banking problem for Wyomingites. But the fight is far from over.”

Getting a master account would be one way Wyoming continues to stand up for its residents, Long said.

If Wyoming had its own master account, that would “get what the original SPDI bank purpose was designed to do, which was let’s protect Wyomingites against this crazy de-banking politicization so we can always have banks that will bank our politically targeted industries, depending upon whoever is in charge.”

Power To The People

Wyoming lawmakers on the Select Committee on Blockchain, Financial Technology and Digital Innovation Technology seemed to like the idea of pursuing a master account for the state.

“At the end of the day, this is about financially empowering people,” state Rep. Cyrus Western, R-Big Horn, said. “Through all the regulations and all the technicalities and all of that stuff, that’s really what this comes down to. And that is why I deeply respect all the efforts by SPDI banks to do just that.”

Given that the Cowboy State had more than 100 meetings with the Federal Reserve to write its SPDI bank laws, the way Wyoming’s been treated by the federal regulators has been disappointing, Western said.

“It’s really just saddening to see folks who are putting their own money, their own intellect to work and getting blocked by the people who are supposed to be helping us,” he said.

Sen. Chris Rothfuss, D-Laramie, also expressed interest in the idea of Wyoming obtaining a master account, but wanted to know more about the details and whether there would be any risks.

Long said she thought the move would be a stretch if Wyoming wasn’t already considering the option for its stable token, but that overall risks are very low, as Texas has already demonstrated.

“The market risk would be out of the equation, and the bank would have direct access to the Fed and to T-bills and could essentially do the SPDI bank business model, but be the enabling bank that provides access to the U.S. dollar payment system.”

Long also pointed out that not long after Custodia Bank was shut out of the Federal Reserve system, the Bank of England announced that all stable coin issuers must use a model very similar to Wyoming’s SPDI bank model.

“They can’t lend because of the risk of bank runs,” she said. “They have to be 100% holding cash so if there’s a bank run everyone gets paid out and the company can ramp back up once confidence restores.”

Rothfuss chuckled a bit at that.

“It’s also a clever idea,” he said.

Lummis-Gillibrand Bill Still In Play

“The Lummis Gillibrand bill, coincidentally, builds on the Wyoming SPDI bank architecture,” Long said. “It also makes implicit reference to this Bank of England recommendation that all stable coin issuing banks will have this exact structure.”

The Responsible Financial Innovation Act sponsored by Sen. Cynthia Lummis, R-Wyoming, and her colleague Kirsten Gillibrand, D-New York, creates a comprehensive regulatory framework for digital assets, as well as consumer protections and safeguards to box out fraud and bad actors, while allowing innovation in the financial sector.

Certified Public Accountant David Pope, who is a member of the Wyoming Stable Token Commission, wanted to know more about the sovereign immunity that Texas waived to get its master account.

Long said the details of that are not public, but she suggested that it was likely guaranteeing the funds in the account, so that in the unlikely event of a default, the Federal Reserve would remain whole.

Long and Pope also discussed whether having a master account would require more staff.

“Effectively, the master account would take the place of the state bank, which I understand is Wells Fargo,” Long said. “So how many people in the state’s Treasury Department manage that Wells Fargo relationship? Those folks would be managing the relationship with the Fed master account.”

Pope said he wouldn’t be in favor of Wyoming starting a state bank as North Dakota has done, but that a master account as described is something he could get behind.

He also recalled the original purpose of SPDI banks.

“One of the provisions we inserted into the SPDI bank statute was that speedy banks would not have to have FDIC insurance,” he said. “That would remove one of the levers of pressure that could be applied to them on the federal side.”

SPDIs Could Become Trusts

Wyoming’s blockchain committee looked at a range of other topics, from data privacy to adding a provision allowing SPDI banks to convert to a state-chartered trust during its two-day meeting Monday and Tuesday.

Trust companies have been finding favor with a variety of digital asset companies right now. Unlike a bank, trust companies don’t lend out assets. And all of the assets are fully segregated from corporate assets.

Laws now allow trusts to perform a number of bank-like functions without having to contract directly with a bank. Many states have exempted trusts from money transmitter licensing requirements as well.

Trust accounts work similar to bank accounts, in other respects though. Assets can be deposited into them, and payments can be made from them.

Renée Jean can be reached at

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Renée Jean

Business and Tourism Reporter