important notes
- The Court of Appeals rejected Custodial’s interpretation that the Fed’s services must be provided, finding that discretion trumps mandatory language.
- Justice Timkovich’s dissenting opinion warned that the ruling confers unreviewable executive power on unappointed officials, raising constitutional concerns under the Appointments Clause.
- The US Federal Reserve rejected Custody’s application in January 2023 after a 27-month review, citing new risks to the cryptocurrency business model.
The U.S. Court of Appeals for the 10th Circuit issued a ruling against Custodi Bank on October 31, affirming the Federal Reserve’s authority to deny master account applications from cryptocurrency banks. The 2-1 ruling upheld a lower court ruling in favor of the Federal Reserve and the Kansas City Fed.
The court held that the Federal Reserve has discretion to deny master account applications from statutorily qualified institutions. According to the court’s written opinion, Judge Ebell’s majority opinion rejected Custodi’s argument that Section 248a(c)(2) of the Financial Control Act, which states that the service “must be available,” imposes an account granting obligation. The majority held that Section 342 of the Federal Reserve Act, which provides that Reserve Banks “may” receive deposits, provides discretion.
Master accounts provide banks with direct access to the Federal Reserve’s clearing systems and allow financial institutions to hold reserves at the Federal Reserve.
Mr. Custodia had argued that language in the Financial Control Act that requires the Federal Reserve’s services “must be available” creates a non-discretionary obligation. The bank argued that it had the right to open the account because it qualified under federal law as a Wyoming-chartered special purpose depository institution.
Court reasoning and dissent
The majority opinion stated that imposing significant access obligations on the pricing principles of the Financial Management Act would be “like finding an elephant in a rat hole.” The court also cited the 2022 Toomey Amendment, which requires reporting of denied applications from eligible entities, as evidence that Congress understands that denials can occur.
Judge Timkovich wrote a dissenting opinion arguing that the Financial Management Act’s “must be available” language is a clear mandate. Opponents raised concerns about the Appointments Clause, warning that the majority’s ruling grants “significant but unreviewable executive powers” to unappointed officials.
In January 2023, the Kansas City Fed rejected Custodea’s application, citing heightened risks due to Custodea’s “novel” and “crypto-focused” business model.
Custodia CEO Caitlin Long is a Wall Street veteran who founded the bank to serve digital asset companies using Wyoming’s SPDI charter.
Unlike federally chartered banks, which automatically receive a master account, state-chartered institutions like Custody must apply separately for access to the Fed. The bank applied to open the account in October 2020 and originally sued the Fed in 2022 for an alleged delay of more than 19 months.
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Disclaimer: Coinspeaker is committed to providing fair and transparent reporting. This article is intended to provide accurate and timely information but should not be taken as financial or investment advice. Market conditions can change rapidly, so we recommend that you verify the information yourself and consult a professional before making any decisions based on this content.
Zoran Spirkovski, Web3 Marketing Strategist and former CMO of DuckDAO, transforms complex cryptographic concepts into compelling stories that drive growth. With a background in cryptocurrency journalism, he excels in developing go-to-market strategies for DeFi, L2, and GameFi projects.
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