A trifecta of recent decisions could hobble the SEC and help crypto banks win key rights.
By Emily Mason, Forbes Staff
As the biggest names in crypto remain embroiled in years-long legal battles with federal regulators, the Supreme Court has delivered them a gift: three landmark decisions weakening the powers of those same federal agencies. That, plus the possibility of a crypto-friendly second Trump Administration and movement in Congress on pro-crypto legislation, are providing tailwinds for the industry.
First, on June 27th, in a 6-3 decision, the conservative majority of the Supreme Court decided in Securities and Exchange Commission v. Jarkesy that when the SEC seeks to fine organizations for fraud without pursuing criminal charges, it must do so in federal courts instead of relying on its own administrative law judges. Under Chairman Gary Gensler, the SEC has made cracking down on the crypto industry a priority. According to an analysis by Cornerstone Research, the SEC brought a record 46 enforcement actions against digital asset firms in 2023, with 20 of them (up from six in 2022), resolved as administrative proceedings. Most of the litigations (20 of 26) alleged fraud, but so did six of the crypto administrative cases, according to the analysis.
The new limit on administrative law judges doesn’t directly affect SEC cases against such high-profile players as asset exchanges Coinbase and Kraken, developer of XRP blockchain Ripple and decentralized protocol Uniswap—they’re already in federal court. But it does cramp the SEC’s enforcement resources and style.
A day later, in Loper Bright Enterprises v. Raimondo, the same six-to-three Supreme Court majority overturned “Chevron deference,” a 40-year-old legal precedent holding that courts should defer to federal agencies’ reasonable interpretations of ambiguous language in the laws Congress has passed. In its new ruling, the court held that the Administrative Procedure Act requires judges themselves to independently interpret the meaning of ambiguous wording, rather than deferring to agency officials.
Finally, on July 1, in Corner Post, Inc. v. Board of Governors of the Federal Reserve System, the court’s conservatives extended the time frame during which businesses can challenge an agency’s rules, opening up the door for decades-old regulations to be called into question by new businesses. And what are crypto businesses, if not new?
Beyond the impact on any single case, the decisions, taken together, sent an unmistakable message: The legal tide has turned against the regulators, including those intent on holding crypto back.
“What we’re seeing is a culmination of deep skepticism of agency overreach that’s been building over not just the last couple of terms, but really over the last couple of decades,” Paul Grewal, chief legal officer for crypto exchange Coinbase, said of the decisions. “The best example of that is Loper Bright where you’ve seen a complete reconceptualization of the role of agencies in interpreting congressional mandates. It’s a throwing up of hands by the Supreme Court at agencies abusing the privilege that they’ve been given since the Chevron decision in a way that is really remarkable.”
Moreover, the Loper Bright decision could eventually come to play a role in a convoluted, but potentially significant crypto industry court fight: Custodia Bank’s lawsuit against The Federal Reserve Bank of Kansas City (FRBKC) and the Federal Reserve Board seeking to gain a coveted “master account”.
Both crypto and fintech startups have been frustrated in their quest to get these master accounts, which provide direct access to the payment “rails” banks use to move money to other banks on behalf of their customers. The systems include FedWire, which handles one-time wire transfers, and the recently launched FedNow real-time payments system, which could eventually give businesses and consumers near instant access to payments (including paychecks) and money moving between financial accounts.
If fintech and crypto firms can’t get master accounts, they’ll have to go through traditional bank partners to move money, potentially stifling innovation–or at least their profits–since they’ll have to kick back part of their fees to traditional banks. In the worst case for newcomers, regulators could pressure traditional banks not to work with them, denying the upstarts even indirect access to the nation’s payment system, a barrier Custodia says it has run into. (The business stakes and opportunities here are substantial, because two of the biggest U.S. banks who serviced crypto clients, Silvergate Bank and Signature Bank, failed during the March 2023 regional banking crisis. Hardly any banks have stepped up since to fill the void.)
In October 2020, Morgan Stanley veteran Caitlin Long received the second Wyoming Special Purpose Depository Institution (SPDI) charter on behalf of Custodia. Kraken Bank, owned by the second-largest U.S. crypto exchange of the same name, received the first a month earlier. This novel charter was created by the state in 2019 in part to accommodate institutions that wanted to hold both crypto and traditional currencies. SPDIs can’t make loans, but they can hold deposits and are eligible for master accounts.
Custodia applied to the Federal Reserve Bank of Kansas City (FRBKC) for a master account and also to the Federal Reserve to become a member bank, in the belief membership would help it secure that essential master account. (In one of many bureaucratic twists in this case, the Fed’s 12 regional Reserve Banks officially handle approval of master accounts, though the Fed itself has set the overall rules for them.) In June 2022, after two years of waiting for a decision on its applications, Custodia sued, aiming to force both the FRBKC and the Fed to act–which they finally did in early 2023, denying the applications. (For its part, Kraken has been waiting for a decision on its application for four years, though it has not taken the central bank to court.) Custodia then amended its lawsuit to claim those denials violated the law.
The master account rejection was a crushing blow to Custodia, which Long started with the aim of providing banking services – including deposit taking, wire services and bitcoin custody services – to digital asset businesses. While Custodia finally started to offer its planned services in select states last year, without a master account it has had to line up and pay bank partners with access to payment services like FedWire.
“We are hamstrung, the Fed is trying to kill us and is trying to not recognize the state’s bank charter at all,” Long complains. But this past March, a Wyoming federal judge ruled against Custodia and the bank is now appealing that decision to the U.S. Court of Appeals for the Tenth Circuit.
Custodia, the crypto industry and the state of Wyoming contend that under the nation’s traditional dual banking system (which allows banks to be chartered at either the state or national level) and under the Monetary Control Act of 1980, the Federal Reserve and Reserve Banks are required to make master accounts available to state banks.
That’s not the way the Federal Reserve sees it. In August 2022, it issued final guidelines dictating a tiered review process for the Reserve Banks to follow when considering applicants for master accounts. Tier 1 applicants have Federal Deposit Insurance Corp. coverage and receive minimal scrutiny before getting an account. Tier 2 applicants may not have FDIC insurance, but are federally regulated and receive an intermediate level of scrutiny. Tier 3 applicants don’t have FDIC insurance and typically have state charters, meaning they’re not otherwise subject to federal oversight and should be subject to “the strictest level of review’’ before being granted master accounts, the guidelines state. (Had Custodia gotten the membership in the Federal Reserve it unsuccessfully sought, it would have been evaluated for a master account under Tier 2 or instead of Tier 3 standards. In its 86-page order denying that membership, the Fed cited Custodia’s lack of FDIC-insurance, its undiversified business model focused on digital assets and concerns about the bank’s management team.)
According to a public database the Federal Reserve maintains, only one Tier 3 applicant has won approval since the guidelines took effect; the applications of more than two dozen others, including four Wyoming banks, are listed as rejected, withdrawn or pending.
Joseph Schuster, a partner specializing in financial regulation in the Denver office of Ballard Spahr, notes that until about 2015 the Federal Reserve granted master accounts to eligible financial institutions without an extensive review process. He suggests that the Loper Bright decision could head off such changes in regulatory shifts as took place at the Fed. “I hope that it will limit the ability of regulators to change positions on statutory interpretation as a result of political changes,’’ he says.
Custodia, however, isn’t currently relying on the Loper Bright decision to make its case. Presumably, that’s because Loper Bright dictates the standard of review under the Administrative Procedures Act that courts should use when evaluating regulations an agency has issued to interpret an ambiguous law—and Custodia argues the Monetary Control Act isn’t ambiguous at all, but explicitly requires state chartered banks to get access to the master accounts.
“Under our interpretation of the Monetary Control Act, the board doesn’t have the ability to tier different institutions in the way that it does in the guidelines,” says Michelle Kallen, a partner in the Washington, D.C. offices of Jenner & Block, who is representing Custodia in appeals court. “The guidelines specifically relegate non-FDIC insured, state chartered banks into a lower tier than nationally chartered banks. They’re treating state chartered banks worse than nationally chartered banks and under our interpretation of the Monetary Control Act, it doesn’t empower them to do that.”
In his March ruling against Custodia, Wyoming U.S. District Court Judge Scott W. Skavdahl rejected that view, but he also saw no ambiguity in the law. “The plain language of the relevant statutes can only reasonably be read to give the Federal Reserve Banks discretion in granting or denying requests for master accounts,’’ he concluded.
Still, it’s worth noting that one appeals court amicus brief supporting Custodia did manage to sneak in a reference to Loper Bright. Writing on behalf of the Digital Chamber and the Global Blockchain Business Council, it quoted from a concurring opinion by Associate Justice Clarence Thomas in the Loper Bright case, while arguing that the FRBKC’s decision to deny Custodia’s application violated both the constitutional separation of powers and federalism (i.e., the dual system of federal and state bank charter and regulation).
“Even if the text left any room for doubt, the district court’s extraordinary understanding of the statute and its grant of unlimited discretion to FRBKC would run afoul of both major structural protections in our Constitution—the vertical constraint of federalism and the horizontal constraints imposed by separation of powers doctrines,” the brief asserts. “That is no small matter, as ‘[s]tructure is everything.’ Loper Bright Enters. v. Raimondo…(Thomas. J., concurring).”
The lead counsel writing that amicus brief? None other than Paul Clement, a former U.S. Solicitor General under President George W. Bush, who successfully argued the Loper Bright case that ended up cutting federal agencies’ power down to size.
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