A federal appeals court has delivered a final legal blow to crypto bank Custodia in its years-long battle with the U.S. Federal Reserve over access to the central bank's payment system. The U.S. Court of Appeals for the 10th Circuit voted 7-3 on Friday to decline Custodia's petition for a rehearing, effectively ending its challenge to the Fed's authority to deny master accounts.
The decision upholds a previous October ruling that Reserve Banks have legal discretion to reject master account applications. Custodia had argued that the court misinterpreted the Monetary Control Act of 1980, which it claims grants eligible institutions a right to an account, and warned the ruling undermines state banking authority and raises constitutional concerns.
In a dissenting opinion, Judge Timothy Tymkovich argued the case was "exceptionally important" for the financial industry and the state-federal regulatory balance. "Holding that the Reserve Banks have unreviewable discretion over master accounts places us on the wrong side of the statutes and, likely, that of the Constitution as well," he wrote.
This legal defeat for Custodia arrives just as the Federal Reserve system is opening alternative pathways for crypto firms. In a significant parallel development, the Federal Reserve Bank of Kansas City recently granted crypto exchange Kraken a special limited master account for its Wyoming-based banking arm. While not a full master account, it provides direct access to Fed payment rails like Fedwire, enabling real-time dollar settlement for institutional clients and reducing reliance on intermediary banks.
Furthermore, the national Federal Reserve Board is developing a new policy framework to offer so-called "skinny" master accounts to crypto companies and other non-traditional financial institutions. This framework, still in early stages, is expected to resemble the Kansas City approach granted to Kraken.
Custodia acknowledged Kraken's approval, noting both companies applied for master accounts in late 2020. The bank stated it will continue pursuing a Fed master account while expanding collaborations with traditional banks in tokenized deposits and stablecoins.
