Supreme Court Veteran Backs Crypto Bank After Toppling Chevron

The method for choosing regional Federal Reserve Bank presidents is unconstitutional and shields them from political and judicial accountability, according to the attorney who successfully argued to overturn judicial deference to regulatory agencies.

Regional Fed presidents have the power to deny master accounts—key accounts that allow banks to access Fed payments and other functions—and should therefore be appointed by the president and confirmed by the Senate, or appointed by an official who won Senate confirmation, Paul D. Clement wrote in an amicus brief filed Wednesday.

In the case before the US Court of Appeals for the Tenth Circuit, Custodia Bank Inc., a Wyoming-chartered cryptocurrency custody bank, is appealing an April federal district court ruling upholding the Fed and the Federal Reserve Bank of Kansas City’s denial of the bank’s application for a master account.

Clement, writing on behalf of the Digital Chamber and the Global Blockchain Business Council-USA, argued that the process for choosing regional Fed presidents is unconstitutional because they advance federal policies by reviewing master account applications.

Regional Fed presidents are chosen by each bank’s board—typically made up of local bank and business executives—and approved by the Fed’s Board of Governors in Washington.

“Allowing the decision below to stand will enable politically unaccountable federal officials to exercise broad discretion to place massive and unwarranted obstacles in the path of state-chartered financial institutions, upending the traditional balance between federal and state banking regulators and affording Federal Reserve Bank presidents expansive power without meaningful political or judicial oversight,” Clement, a former US solicitor general during the George W. Bush administration, wrote.

Clement’s brief cited the US Supreme Court’s June 28 ruling in Loper Bright Enterprises Ltd. v. Raimondo that eliminated the longstanding Chevron doctrine requiring judicial deference to federal regulators on their interpretation of ambiguous laws. Clement, who argued that case before the high court, has represented several crypto groups challenging how federal agencies police the industry.

Crypto Bank Fight

Custodia’s case has been closely watched for how it affects cryptocurrencies and the development of new state banking charters for such companies operating in the digital asset space.

The bank, which operates under a special Wyoming banking charter for digital asset companies, applied for a master account in October 2020. Such applications are typically approved in days.

But Custodia sued the Fed and the Kansas City Fed in June 2022, claiming its application was improperly delayed.

The Fed ultimately denied Custodia’s application after the lawsuit was filed. Custodia then filed an amended complaint in February 2023 arguing the central bank was engaged in a campaign with the White House and other federal banking regulators against state banks serving the cryptocurrency industry.

Judge Scott W. Skavdahl of the US District Court for the District of Wyoming dismissed Custodia’s case in April and the bank appealed soon after.

Skavdahl’s decision was incorrect because federal law “effectively commands that nonmember institutions be given master accounts,” Donald B. Verrilli Jr., a former solicitor general in the Obama administration, wrote in a Wednesday amicus brief on behalf of the Blockchain Association.

The Blockchain Association brief didn’t address the regional Fed president appointment issue.

Clement went farther than Verrilli in one other area, arguing that Skavdahl’s decision threatened the ability of states to charter banks.

“Thus, the district court’s reading would give federal officials the authority and unilateral discretion to effectively nullify the chartering decisions of state regulators—regulators who hold great expertise and co-equal authority under our dual banking system,” he wrote.

Clement & Murphy PLLC represents the Digital Chamber and the Global Blockchain Business Council-USA.

Jenner & Block LLP and Williams & Connolly LLP represent Custodia Bank.

The case is Custodia Bank Inc. v. Federal Reserve Board of Governors, 10th Cir., No. 24-8024, Amicus Brief 7/3/24.