A federal appeals court has dealt a significant blow to Custodia Bank's multi-year effort to gain direct access to the Federal Reserve's payment system. The ruling, issued Friday by the Tenth Circuit Court of Appeals in Denver, upholds the Fed's authority to deny crypto-focused banks master account access, keeping these institutions locked out of the central banking infrastructure.
Court's Ruling and the Fed's Discretion
The 2-1 decision affirms a lower court ruling from last year and concludes that while Custodia meets technical eligibility requirements, eligibility alone doesn't guarantee entitlement to a master account. Judge David Ebel, writing for the majority, emphasized that the Fed must retain discretion over account approvals to protect the nation's financial stability.
Master accounts give financial institutions direct access to Fed services, including payment clearing and wire transfers, which are essential tools for operating within the traditional banking system. The Wyoming-based Custodia has argued that its exclusion from this network puts it at an unfair disadvantage despite meeting the necessary criteria under the state's Special Purpose Depository Institution charter. Similar challenges face other crypto-focused institutions looking to bridge the gap between digital assets and traditional finance, including projects like Maxi Doge token, which build social ecosystems that require reliable payment infrastructure.
"We reject Custodia's attempt to impair the Fed's ability to safeguard our nation's financial system through the exercise of discretion," Ebel wrote in the opinion. The judge pointed to both governing legislation around the Fed and a Congressional amendment that grants the central bank discretion in these matters.
Custodia’s Lawsuit
The Federal Reserve Bank of Kansas City, which would serve as Custodia's supervisory entity, determined that the bank's business model, centered on the custody and settlement of crypto assets, posed "undue risk" to the broader financial system. This assessment formed the basis for the Fed's rejection of Custodia's application.
In 2022, Custodia brought a complaint against the Federal Reserve regarding its slow review of the applicant's master account application. After the Federal Reserve denied the application, Custodia amended its complaint. In the amendment, they claimed that the Federal Reserve lacked the legal authority to deny custodial accounts to eligible depository institutions. The District Court and the Appeals Court have rejected this claim.
Timothy Tymkovich, U.S. Circuit Judge for the 10th Circuit, issued a dissenting opinion and stated that the laws that govern the Federal Reserve require the Federal Reserve to provide payment services to all eligible non-member depositories. He noted that, "This case comes clothed in 21st-century terms: cryptocurrency, digital assets, instant wire transfers, and master accounts,… but there is nothing new with this issue".
No Master Accounts for Crypto
Custodia called the ruling "disappointing" but highlighted Tymkovich's dissent as validation of its position. "We were hoping for a win at the Tenth Circuit today, but we received the next best thing — a strong dissent," the bank said in a statement posted on X. The company indicated it may petition for a rehearing based on conflicting interpretations in the case.
The appeals court also rejected Custodia's claims that the Kansas City Fed illegally coordinated with the Federal Reserve Board of Governors and the Biden administration to deny its application. "Custodia points to nothing in the record that would allow us to conclude that it was not FRBKC who made the final decision," the ruling stated.
The decision leaves crypto-oriented financial institutions still excluded from direct access to the US payments infrastructure. So far, no crypto-focused bank has successfully obtained a master account from the Federal Reserve.
Summary
At this time, Custodia and similar organizations will need to continue operating without direct access to the Federal Reserve by forming partnerships with traditional banks or using alternative payment processing networks.
Caitlin Long, the bank's founder, has been very vocal about her view that regulatory barriers prevent crypto businesses from having equal access to the banking system and favor stablecoins issued by major financial institutions. It is unclear at this point whether Custodia Bank will seek to have its case reviewed again or explore other legal avenues to resolve its issues.
