- US appeals court upholds Federal Reserve authority to deny Custodia Bank a master account for direct payment access.
- Custodia Bank loses final appeal after five year legal fight for Federal Reserve master account access.
- Court ruling confirms Federal Reserve banks can decide which institutions receive master accounts for payments.
The U.S. Court of Appeals of the Tenth Circuit has denied the request of Custodia Bank to restart its suit against the Federal Reserve. The ruling sustains a previous decision that favors the central bank in its power to determine the master account approvals. On March 13, the judges voted 7–3 against rehearing the case. Consequently, Custodia’s legal challenge over access to the Federal Reserve payment system has reached its final stage.
Custodia has pursued a master account since October 2020. Such accounts allow banks to hold reserves directly at the Federal Reserve. They also enable institutions to pay via the Fed system without the intermediary banks. Nonetheless, in 2023, the application was rejected by regulators after they examined the crypto-centered business model of the bank.
The court decision confirms that regional Federal Reserve banks retain discretion when reviewing these applications. Therefore, the central bank is not required to approve every request from state-chartered institutions.
Court Declines to Reopen Custodia’s Case
The appeals court declined to rehear the dispute en banc. As a result, the October ruling from the same court remains the controlling decision. That ruling found that Federal Reserve banks have authority to decide which institutions receive master accounts.
Custodia argued that federal law guarantees access to Federal Reserve services for state-chartered banks. The bank relied on the Monetary Control Act to support its claim. However, the court concluded that the law does not require automatic approval of account requests.
Instead, the ruling affirmed that Reserve Banks may evaluate each application based on safety and operational considerations. Consequently, regulators may deny access when they believe risks are present.
Custodia’s Crypto Banking Model Faces Regulatory Concerns
Custodia operates as a Wyoming-chartered bank that focuses on digital asset services. The institution aims to provide custody and payment tools for companies working in the blockchain sector. Direct access to a master account would allow the bank to settle payments through Federal Reserve rails.
However, regulators raised concerns about the risks associated with crypto-related activities. Officials argued that such activities could raise questions about financial stability and banking safety. As a result, the Federal Reserve rejected Custodia’s application in 2023.
Following that decision, Custodia filed a lawsuit challenging the rejection. The bank argued that the Federal Reserve lacked authority to deny access once a bank receives a legal charter. A Wyoming judge denied the FED’s attempt to dismiss Custodia’s suit allowing the bank to proceed with plausible claims.
However, several courts have rejected that interpretation during the legal process.
Kraken Approval Signals Limited Access Path
The ruling arrives shortly after another crypto-related development. Kraken recently received a master account from the Federal Reserve Bank of Kansas City. The approval allows the platform to connect to the Fedwire payment system.
However, the account offers limited functionality compared with traditional banking accounts. It does not provide the full set of Federal Reserve services available to conventional banks.
Nevertheless, the decision created discussion around “skinny” master accounts for crypto institutions. These accounts could allow restricted access to payment rails without granting full banking privileges.
Dissent Raises Concerns Over Federal Reserve Authority
Three judges supported Custodia’s position and issued a dissenting view. The dissent argued that the majority interpretation gives excessive authority to Federal Reserve banks.
The opinion emphasized that master accounts remain essential for routine banking operations. Without them, banks must rely on intermediaries to process payments and settlements.
The dissent also noted that Federal Reserve officials initially suggested Custodia’s application did not face major obstacles. However, regulators later rejected the request after extended review.
In addition, the dissent warned that broad discretion could allow Reserve Banks to block certain institutions from core financial infrastructure. The judges argued that courts should allow further examination of the Federal Reserve’s authority in such cases.
