Court Denies Crypto Bank Custodia’s Bid to Pry Master Account From Unwilling Fed

In brief

A federal appeals court affirmed the Fed’s ability to deny crypto bank Custodia a master account.
Custodia had argued the Fed had no choice but to award a master account to eligible banks. The Fed said it could deny Custodia an account based on the risk posed by crypto activity.
Custodia said it may seek a rehearing. Potential Fed leadership changes could shift policy on crypto banks in the meantime.

A federal appeals court in Denver poured cold water Friday on crypto bank Custodia’s attempts to force the Federal Reserve to grant it a coveted master account, siding with a lower court’s previous decision.

A panel of three judges affirmed that Custodia is not owed a master account just because it is technically eligible for one, and sided with the Federal Reserve’s arguments that the central bank has the right to deny such privileges in certain cases.

In the case of Custodia, the Fed’s Kansas City branch determined the bank’s crypto-focused business model introduced undue risk into the U.S. banking system.

Master accounts, possessed by all federally chartered banks, allow for direct payments from, and access to, the Fed’s services. They are thus a valuable asset that would permit a financial institution to operate nationally and greatly expand their services. So far, zero crypto-focused banks have been awarded such privileges by the Fed. Custodia currently operates under a special-purpose depository institution (SPDI) charter granted by the state of Wyoming.

Notably, Friday’s decision against Custodia, which affirmed a federal district court ruling from last year, was 2-1 on a panel of majority-Republican appointed judges, with Judge David Ebel, who was appointed to the bench by former president Ronald Reagan, writing Friday’s judgment.

“We conclude the plain language of the relevant statutes grants Federal Reserve Banks discretion to reject master account access requests from eligible entities,” Ebel wrote. “Therefore, we reject Custodia’s attempt to impair the Fed’s ability to safeguard our nation’s financial system through the exercise of discretion to reject master account access.”

The sole dissenting judge, George W. Bush appointee Timothy Tymkovich, argued a relevant statute which says the Fed’s payment services “shall” be available to eligible non-member banks should force the Fed to grant master accounts to all eligible banks, including Custodia.

“This case comes clothed in 21st Century terms: cryptocurrency, digital assets, instant wire transfers, and master accounts,” Tymkovich wrote in his dissent. “But there is nothing new about this issue.”

When reached for comment on today’s decision, Custodia founder Caitlin Long referred Decrypt to a statement issued by the company.

“While we were hoping for a win at the Tenth Circuit today, we received the next best thing—a strong dissent,” the bank said.

The company went on to say it may seek a rehearing by the Tenth Circuit on the case, arguing the decision should be considered split because of another ruling made by a different judge on a similar matter in the same jurisdiction.

The war for crypto master accounts may soon be largely resolved without the courts weighing in, however. Once Fed chair Jerome Powell, long a target of President Donald Trump’s ire, leaves office, Fed governors more closely aligned with the White House are expected to exert their control of the central bank to undo its current crypto-skeptical policies.

Earlier this month, Fed governor Christopher Waller, one of the top candidates to succeed Powell, floated the idea of offering specialized “skinny” master accounts to all manner of crypto- and innovation-focused banks on an accelerated timeline.