Key Takeaways:
- A federal appeals court ordered no hearing regarding a complaint by Custodia Bank against the challenge of the Fed on that refusal to open a master account.
- The ruling effectively ends the crypto-focused bank’s multi-year effort to gain direct access to the Fed’s payment system.
- A dissenting judge argued that denying a master account can severely limit a bank’s ability to operate.
A U.S. federal appeals court has declined to reconsider the legal challenge of Custodia Bank against the Federal Reserve, hence closing this crypto-focused bank effort to take the direct access to payment system of the central bank
This decision maintains the earlier rulings intact and strengthens the power of the Federal Reserve to decide whether financial institutions receive master accounts.
Court Rejects Custodia’s Request for Rehearing
The U.S. Court of Appeals for the Tenth Circuit denied Custodia Bank’s petition for an en banc rehearing, meaning the case will not be reconsidered by the court’s full panel of judges.
Custodia had asked the court to review prior decisions that sided with the Federal Reserve and the Federal Reserve Bank of Kansas City. The bank argued that federal law requires Reserve Bank services to be available to eligible institutions and that access should include the master accounts needed to use those services.
After circulating the petition among active judges, the court held a vote but failed to reach the majority needed to reopen the case. As a result, the petition was formally denied. This outcome effectively ends Custodia’s legal effort to challenge the rejection of its master account application.
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Custodia’s Push for Direct Fed Access
Custodia Bank is a Wyoming-chartered Special Purpose Depository Institution (SPDI) designed to provide banking services to digital asset companies. The bank was optimistic of connecting crypto gigs with the U.S. dollar payment network. A Fed master account allows banks to deposit reserves in the central bank and access large transfers such as wire transfer and electronic settlements.
Custodia resubmitted its master account request as way back as October 2020, but had been on the reserve list since then before the Federal Reserve Bank of Kansas City shut it down in January 2024. Without a master account, institutions typically must rely on correspondent banks to access the Fed’s payment infrastructure.
Judge Warns About Impact on Banks
Although the court declined to reopen the case, not all judges agreed with the decision.
Circuit Judge Timothy Tymkovich issued a dissent, arguing the issue deserved further review. He described a master account as essential for a bank operating in the modern financial system and warned that denying one can significantly restrict a bank’s ability to function.
Tymkovich also cited that this allows the Fed to have an effective option of including or excluding state-chartered banks which may use the U.S. banking system fully on the provision that the Fed will retain significant discretion to accept or reject accounts.
The ruling preserves the authority of Fed to deliver master accounts and continues to demonstrate the collision thus far unfolding between crypto-centered lenders and conventional banking overseers.
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Source: https://www.cryptoninjas.net/news/us-appeals-court-rejects-custodia-banks-fed-account-bid-in-major-blow-to-crypto-bank/
