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A federal appeals court in Denver has confirmed the right of the Federal Reserve to deny access to the crypto-focused bank Custody to a master account, giving a major blow to the announcement of the institution based in Wyoming to obtain direct access to the central banking system of the United States.
Key tips:
- The US Tenth Circuit Court of Appeals has ruled that the Fed has the discretion to deny crypto-focused banks access to master accounts.
- Judge David Ebel wrote that the Fed’s authority to reject such requests is essential to “safeguarding the financial system.”
- The decision keeps crypto banks like Custodia locked out of Fed payment systems.
In a 2-1 decision, the Tenth Circuit Court of Appeals agreed with a lower court that the Fed has discretion over which financial institutions can hold master accounts, allowing direct access to Fed services such as payment clearing and wire transfers.
The court concluded that while Custodia is technically eligible, eligibility does not guarantee the right.
Judge Says Fed Has Right to Refuse Custody to ‘Save Financial System’
Writing for the majority, Judge David Ebel, appointed by former President Ronald Reagan, said the law gives the Fed authority to “reject master account access requests from eligible entities” to protect financial stability.
“We reject Custody’s attempt to compromise the Fed’s ability to safeguard our nation’s financial system through the exercise of discretion,” Ebel wrote.
Custodia, which operates under the Charter of the Special Depository Institution of Wyoming (SPDI), argued that it was unfairly excluded from the national banking network despite the necessary criteria.
The Federal Reserve Bank of Kansas City, however, determined that Custody’s business model, centered on the custody and liquidation of crypto assets, presented “undue risk” to the broader financial system.
In a dissenting opinion, Judge Timothy Tymkovich, appointed by President George W. Bush, argued that the Fed’s statutes require it to provide payment services to all eligible nonmember banks, including Custodia.
“This case is seen in 21st century terms: cryptocurrency, digital assets, instant wire transfers, and master accounts,” he wrote. “But there is nothing new about this issue.”
Custodia called the decision “disappointing,” but pointed to Tymkovich’s dissent as validation of his position.
“We were hoping for a victory in the Tenth Circuit today, but we got the next best thing — a strong dissent,” the bench said, adding that it could seek a retrial based on a conflicting decision in a related case.
The decision leaves Custodia, and other crypto-oriented financial institutions, still closed from direct access to the payment infrastructure of the United States. So far, no crypto-focused bank has received a master account.
Fed Governor Floats ‘Skinny’ Master Accounts for Crypto-Focused Banks
In particular, the regulatory landscape could change soon.
As reported, the Federal Reserve plans to open its payment network to stablecoin issuers and fintech companies without the requirement to partner with traditional banks, a significant policy reversal after years of hesitation towards crypto.
Fed Governor Christopher Waller announced last week that the proposal during the Central Bank Payments Innovation Conference on October 21, introducing new “payment accounts” or “lean master accounts” for legally eligible institutions.
These limited-access accounts connected firms directly to the Fed’s payment rails, maintaining strict safeguards to reduce systemic risk.
Under the proposal, participating companies will face balance sheet limits, no interest on deposits, and no overdraft privileges, ensuring minimal exposure to the Fed’s balance sheet.
Waller said the new structure aims to keep the central bank competitive with rapid innovation in payments.
