Federal court ends Custodia Bank's legal bid for a master account

A US federal court has definitively rejected Custodia Bank's final attempt to challenge the Federal Reserve's authority in granting master accounts. The US Court of Appeals for the Tenth Circuit, in a 7-3 vote, announced it would not rehear Custodia's appeal, effectively concluding the crypto-focused bank's five-year legal battle for direct access to the central bank's payment system.

Background of the Master Account Dispute

Custodia Bank initially applied for a master account in October 2020. Such an account allows financial institutions to hold reserves directly with the Federal Reserve and access its payment rails, bypassing the need for intermediary banks to settle transactions. After the Fed rejected its application, Custodia argued that the Monetary Control Act mandates state-chartered banks be granted access to Fed services, including master accounts.

Court Rulings and Kraken's Precedent

Multiple courts have consistently ruled that the Federal Reserve retains discretionary power over granting master accounts. This decision comes as Kraken recently became the first crypto platform to secure a master account from the Federal Reserve Bank of Kansas City on March 4. Kraken's account grants it access to the Fedwire payments system, although it does not encompass the full suite of services available to traditional banks. This development had previously sparked hopes for limited or "skinny" master accounts for crypto firms.

Dissenting Opinion Highlights Bank's Need

Despite the majority ruling, a dissenting opinion from Judge Timothy Tymkovich emphasized the critical nature of master accounts. He stated that a master account is "indispensable" for a bank's daily operations and that being denied one is "akin to a death sentence." Judge Tymkovich also noted that the Fed had previously indicated Custodia's application had "no showstoppers" and disagreed with the Reserve Banks' asserted discretion over such applications.