Court Rules Against Custodia Bank as Federal Reserve Retains Power to Block Crypto Access

TLDR

• Custodia Bank loses appeal; Fed can block crypto banks from master accounts.
• Federal court backs Fed’s authority to deny payment access to crypto firms.
• Crypto bank Custodia’s path to Fed access blocked by Tenth Circuit ruling.
• Fed’s legal power to deny master accounts gains court validation.
• Custodia eyes further appeals after Fed rejection of master account bid.

A U.S. appellate court rejected Custodia Bank’s appeal to secure a Federal Reserve master account, affirming the Fed’s authority. The ruling confirmed that the central bank can deny such accounts to crypto-focused banks, regardless of eligibility. Custodia may pursue further legal action, but its path to national payment access remains blocked.

Federal Reserve Gains Legal Backing to Withhold Master Accounts

The U.S. Court of Appeals for the Tenth Circuit ruled that Federal Reserve Banks can deny master account access at their discretion. The court’s 2-1 decision supported a lower court judgment and emphasized statutory interpretation favoring the Fed’s authority. Judge David Ebel concluded that eligibility alone does not guarantee approval for a master account.

The judgment addressed Custodia’s argument that the Monetary Control Act mandates account approvals for eligible banks. However, the court referenced Section 342 of the Federal Reserve Act, which allows discretion in deposit approvals. The court also pointed to recent legislation acknowledging potential rejections, supporting the view that denial is within the law.

Judge Timothy Tymkovich dissented, arguing that the language “shall be available” in the law requires approval for eligible applicants. He claimed the decision gives unchecked power to Federal Reserve officials not appointed by the President or confirmed by the Senate. The dissent raised constitutional concerns under the Appointments Clause about the Fed’s unreviewable discretion.

Custodia’s Application Timeline and Legal Arguments

Custodia applied for a master account in October 2020 but waited more than 19 months without resolution. It sued the Federal Reserve in 2022, accusing it of unlawful delays and attempting to force a decision. However, the Fed formally rejected the application in January 2023, citing concerns with Custodia’s crypto business model.

The Kansas City Federal Reserve Bank found Custodia’s operations incompatible with sound banking practices due to its digital asset exposure. That determination was central to the Fed’s argument in court, which the appellate judges accepted. Custodia’s Wyoming-chartered SPDI status did not guarantee automatic access to the Fed’s services.

The bank sought access to the Federal Reserve’s payment systems to offer direct transfers and expand nationwide services. Without a master account, it remains excluded from essential infrastructure that federally chartered banks routinely access. So far, no crypto-focused bank has obtained a master account from the Federal Reserve.

Potential Rehearing and Custodia’s Next Moves

Following the loss, Custodia stated it is considering a petition for a rehearing before the appellate court. The company highlighted the dissent as a foundation for possible further appeals to reconsider the ruling. It has not indicated whether it will escalate the case to the Supreme Court.

Custodia CEO Caitlin Long has not released additional comments since the judgment became public. The bank, originally launched as Avanti in Wyoming, rebranded in 2022 while maintaining its digital asset focus. It continues to operate under Wyoming’s SPDI charter but lacks federal integration.

The case reinforces the Federal Reserve’s position to assess risk and deny access based on banking safety standards. While Custodia’s eligibility remains undisputed, discretion now holds greater legal weight. The ruling strengthens the Fed’s control over which institutions can access its network, especially in emerging sectors like crypto.

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