Federal Court Denies Final Appeal in Custodia Bank’s Master Account Battle
In a decisive ruling, a US federal appeals court has denied Custodia Bank’s last-ditch effort to compel the Federal Reserve to grant it a master account, concluding a protracted five-year legal struggle over access to the central bank’s payment system.
The US Court of Appeals for the Tenth Circuit issued its decision on Friday, with a 7-3 vote refusing to hear Custodia’s final appeal on the core legal question. This affirmation of lower court rulings means the crypto-focused bank, chartered in Wyoming, will not gain direct entry to the Federal Reserve’s settlement rails.
What is a Master Account and Why Does It Matter?
A master account allows a financial institution to hold reserves directly at a Federal Reserve Bank and access critical payment systems like Fedwire. This enables real-time gross settlement of transactions without relying on intermediary banks, a fundamental capability for any bank’s operational viability and liquidity management.
Custodia first applied for this account in October 2020. After the Federal Reserve denied the application, the bank sued, arguing that the Monetary Control Act of 1980 mandates that state-chartered banks must have access to Federal Reserve services, including master accounts. The Fed and successive courts have held that the central bank retains discretionary authority in granting these accounts, a position now solidified by the Tenth Circuit’s denial of review.
“Akin to a Death Sentence”: A Strong Dissent
While the majority upheld the Fed’s discretion, a forceful dissent from Judge Timothy Tymkovich, joined by two other judges, highlighted the severe practical consequences of being denied a master account.
“A master account is ‘indispensable’ for a bank’s operations,” Judge Tymkovich wrote. “Being denied one is akin to a death sentence.” He pointedly noted that just three months after Custodia’s 2020 application, the Federal Reserve Bank of Kansas City had informed the bank it was eligible and that there were “no showstoppers” to its application. The judge argued he would have allowed Custodia’s legal claim (a writ of mandamus) to proceed, directly challenging the Fed’s asserted discretionary power.
Contrast with Kraken’s Recent Approval
The ruling against Custodia comes just weeks after a significant, albeit different, development for the crypto industry. On March 4, the Federal Reserve Bank of Kansas City announced that Kraken, the cryptocurrency exchange, had been granted a master account.
Kraken’s approval enables it to connect directly to the Fedwire Funds Service, a major US payment system. However, it is important to note this is not a full banking master account; it is a limited “pass-through” or “non-settlement” account that does not grant the same range of services—like direct access to the discount window or certain liquidity tools—available to traditional, comprehensively regulated banks.
This distinction has led industry observers to speculate that regulators may be open to offering “skinny” or limited master accounts to certain crypto-native firms, a path that remains closed to Custodia following this court decision.
The case, Custodia Bank v. Board of Governors of the Federal Reserve System, underscores the ongoing tension between innovative financial entities and established regulatory frameworks. For now, the Federal Reserve’s authority to discretionarily gatekeep access to its core payment infrastructure has been firmly upheld by the courts.
Related: Democrats say they will oversee reported DOJ probe into Binance
Magazine: Clarity Act risks repeat of Europe’s mistakes, crypto lawyer warns
