The U.S. Court of Appeals for the Tenth Circuit rejected Custodia Bank’s bid to revive its legal challenge against the Federal Reserve Bank over access to the U.S. banking system. In a March 13 decision, the appeals court voted 7-3 against a retrial and upheld an earlier October ruling.
The court’s decision in Custodia Bank v. Federal Reserve Case
The ruling determined that regional Federal Reserve banks have the authority to decide whether financial institutions can obtain a so-called “master account,” which provides direct access to the central bank’s payment infrastructure. Basic accounts allow banks to send and settle payments through the Federal Reserve System without relying on intermediary institutions.
Without such access, banks must run transactions through a partner bank that already has an account with the central bank. Custodia, a Wyoming chartered bank focused on digital assets, is seeking a principal account in 2020. The institution argues that direct access will allow it to offer payment and settlement services to Web3 companies, avoiding dependence on traditional banking partners. The Federal Reserve rejected that request in 2023.
Custody Bank faces rejection in the 10th round
Regulators cited concerns over the bank’s crypto-focused business model, saying the activities could pose a risk to security, stability and financial stability. Following the decision, the Custodian filed a lawsuit alleging that the Federal Reserve is required by federal law to issue key accounts to legally chartered banks.
The bank argued that the central bank does not have unfettered authority to deny access once the institution is properly licensed. Courts have so far sided with the Federal Reserve. An earlier Tenth Circuit decision found that the law does not compel the central bank to approve every application, and that the reserve banks reserve judgment on whether to issue accounts.
The Court of Appeal refused to review the case and left this interpretation unchanged. The decision also reflects ongoing tensions between crypto-focused financial institutions and US regulators over how digital asset trading should integrate with the traditional banking system.
Custodia has positioned itself as a regulated bank designed to serve crypto companies, offering custody and payment services related to blockchain assets. Master account access allows the bank to process transactions directly through the Federal Reserve’s payment rails, rather than through correspondent banks.
The decision was not unanimous. In a dissent, Justices Timothy Tymkovich and Allison Eide argued that the majority’s approach gives the Federal Reserve banks too much unchecked discretion. Opponents have warned that allowing the reserve banks broad discretion could allow them to effectively block state-chartered institutions from accessing the core infrastructure of the US financial system.
