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Hassan Shittu
Journalist
Hassan Shittu
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A US appeals court has ruled against Custodia Bank, the crypto-focused institution in Wyoming founded by former Morgan Stanley executive Caitlin Long, in its long battle to gain direct access to the Federal Reserve’s payment system.
In a decision filed on Friday, the United States Court of Appeals for the Tenth Circuit affirmed a first decision from the District of Wyoming that sided with the Board of Governors of the Federal Reserve and the Federal Reserve Bank of Kansas City.
Tenth Circuit Upholds Fed’s Decision to Block Custody Access to US Payment System
The ruling marks the latest setback in the Custody’s five-year effort to obtain a Federal Reserve “master account,” a critical gateway for direct participation in the U.S. banking system.
“This case comes across in 21st century terms: cryptocurrency, digital assets, instant wire transfers, and master accounts,” the judges wrote in the opinion.
“But there is nothing new about this problem. The courts have investigated the legality of our nation’s central bank and interpreted the relevant statutes since the foundation.”
The three-judge panel, composed of Circuit Judges Tymkovich, Ebel and Rossman, upheld the lower court’s conclusion that the Federal Reserve acted within its authority when it denied the Custody application.
The decision leaves the central bank’s decision intact, confirming that the Fed retains wide discretion in determining which financial institutions can access its payment infrastructure.
Custodia, formerly known as Avanti Bank, first applied for a master account in October 2020 after receiving a special depository institution (SPDI) card from the state of Wyoming.
The application, typically processed within a week, languished for more than 19 months without resolution.
In January 2023, the Federal Reserve Bank of Kansas City formally rejected the request, citing “security and soundness” concerns related to the bank’s focus on digital assets.
The Fed argued that Custody’s business model relied too heavily on volatile crypto markets and lacked sufficient controls to manage illicit financial risks.
He also pointed to the bank’s limited experience in traditional risk management and the potential systemic implications of granting direct access to a crypto-centric institution.
custody sued the Federal Reserve in June 2022alleging “unlawful delay” and arguing that eligible institutions are entitled to a master account under federal law.
After the Wyoming court ruled in favor of the Fed in March 2024Custodia appealed, claiming that the decision gave the central bank excessive discretion on market access.
Friday’s decision reaffirmed the lower court’s position, dealing another blow to Long’s push to integrate banking crypto into the US financial system.
In a statement published to X after the judgment, Custodia said it was “actively considering” a petition for a review.
“While we were hoping for a victory in the Tenth Circuit today, we received the next big thing — a strong dissent,” the company wrote, referring to a partial dissent that raised constitutional questions about the Federal Reserve’s authority.
Why Fed Grant Crypto Firms Don’t Have a Master Account?
A Federal Reserve master account would have allowed Custodia to connect directly to core US payment systems, such as Fedwire and the Automated Clearing House (ACH).
Such access allows banks to settle transactions, maintain reserves and participate directly in monetary policy operations, benefits currently limited to regulated deposit institutions.
Crypto-focused companies have long sought similar access to improve efficiency and reduce reliance on intermediary banks.
However, the Federal Reserve has not approved any master account applications from crypto-native institutions to date.
The central bank has repeatedly mentioned the high volatility of the sector, the potential for fraud, and insufficient consumer protection as reasons for caution.
The Custody case has become a focal point in the broader debate about how traditional banking regulation should apply to crypto businesses.
Long has accused the Fed of double standardsarguing that large traditional banks receive preferential treatment while smaller innovators face “debanking”.
In April, Long criticized the Federal Reserve for maintaining restrictions which prevent banks from directly holding crypto or issuing stablecoins on public blockchains like Ethereum.
She argued that the Fed continues to favor private blockchain systems controlled by major banks, creating a competitive imbalance.
At the beginning of this year, Custodia announced had launched “Avit”, a stablecoin tokenized in US dollars issued in conjunction with Vantage Bank on Ethereum.
The project, backed by demand deposits held in the banking system, has been described as the first stablecoin issued by a US bank implemented on a public blockchain.
Long said the initiative demonstrated that banks could “tokenize on-demand deposits on a permissionless blockchain in a fully regulatory manner.”
Despite such efforts, federal regulators have maintained a cautious stance.
Speaking in March, Long said that under the current administration, no significant changes have been made to the rules that label the exposure of digital assets as “unsafe and unsound” for banks.
