Custodia, the Bitcoin bank that would be the first to have a master account if approved, is suing the Federal Reserve and Kansas City Reserve for failing to act on its application. The Federal Reserve is supposed to act on a bank’s master account application within 12 months, and Custodia’s was filed over 19 months ago.

The lawsuit claims the Federal Reserve Board of Governors illegally delayed acting upon the Custodia master bank application within the specified legal period of one year. However, the lawsuit alleges, not only is the plan still not approved after 19 months, but the process normally takes between five to seven days for the Federal Reserve to act on a master account application.

The Federal Reserve website states that the “master account is both a record of financial transactions that reflects the financial rights and obligations of an account holder and of the Reserve Bank with respect to each other, and the place where opening and closing balances are determined.”

Custodia bank is chartered in Wyoming, where a statute that passed in 2019 allows for “special purpose depository institutions,’’ such as digital banks.

Court documents allege that the Kansas City Federal Reserve began processing the master bank plan application as expected, until Spring 2021. The suit claims that’s when the Federal Reserve became involved in reviewing the application, and that no approval or denial followed suit.

Custodia’s lawsuit seeks to legally force both the Federal Reserve and the Kansas City Reserve to take action regarding the master bank plan application.

Approving Custodia for the first master bank account in the US would be a milestone for Bitcoin banks around the world. Traditional brick-and-mortar banks are facing transformational changes, including hybrid branches that offer more digital services, remote services, and expectations of a new merging of blockchain and Bitcoin-powered currencies included in the mix.

The crypto Custodia lawsuit heralds a radical change in the banking industry.

"Through this lawsuit, Custodia seeks to ensure that its Federal Reserve master account application receives the fair dealing and due process guaranteed to it by both federal statute and the U.S. Constitution,” said Custodia Bank’s spokesperson Nathan Miller in a statement. “Custodia has satisfied every rule applicable to it, and has gone beyond by applying to become a Fed member bank."

Custodia Bank, originally called Avanti Financial Group, was founded in 2020. Their business model differs from traditional banks. Instead of relying upon mostly loan revenues, Custodia plans to keep custody of the cryptocurrency it holds in the banks.

The bank chose Wyoming for its master bank because of the new state regulations passed in 2019. Under the new crypto-supportive statute, banks are allowed for“special purpose depository institutions,’’ meaning the master bank account can reduce its costs and offer a bridge between the current U.S. dollar system with digital assets such as cryptocurrency.

The lawsuit says the Federal Reserve’s delay in acting on their application is detrimental to Custodia.

“This delay in processing Custodia’s master account application is resulting in substantial, ongoing injury to Custodia,” the suit says. “The immediate injury is that the delay has forced Custodia to defer its solo entry into the financial services market in favor of a decidedly second-best and far more expensive alternative: launching with a correspondent bank—which has a master account— while Custodia awaits a decision on its long-pending application.”

The lawsuit’s accusations of the Federal Reserve sitting too long on this cryptocurrency bank application are still pending.