The battle between Bank of Custody and the Federal Reserve has once again taken a turn for the worse, but it’s not in crypto’s favor. The U.S. Court of Appeals for the 10th Circuit has upheld the Federal Reserve’s decision to deny Custody Bank a master account, effectively locking the cryptocurrency-only bank out of the nation’s central banking system for the foreseeable future.
Why the U.S. court refused to open a master account with Custodia Bank
Custodia applied for a master Fed account in 2020 with the aim of bridging cryptocurrencies and traditional banking. After waiting 19 months, the Fed rejected the request in January 2023, citing weak risk controls in the crypto-focused model.
Custodia filed suit, arguing that the Fed had no right to deny qualified applicants. However, the Court of Appeals recently ruled in favor of the Fed, upholding its authority to protect financial stability.
In a recent decision, the appellate court sided with the Fed.
- The court made clear that master account status does not guarantee access.
- Judge David Ebell said the Fed’s discretion is essential to “protect the nation’s financial system.”
- The court found that the Fed lawfully exercised its supervisory authority and that Custodia’s claims did not override the Fed’s statutory authority.
Hope continues despite judge’s opposition
Judge Timothy Timkovich dissented from the decision, saying the Fed’s rules require giving access to all eligible banks. Custodia said he was “disappointed” by the ruling, but said he may appeal because similar cases could set a different precedent.
For now, the decision leaves crypto-focused banks locked out of the Fed’s payments system, a setback for banks seeking to bridge crypto and traditional finance.
Fed considers restricting access to crypto companies
Still, change may be coming. Federal Reserve Governor Christopher Waller has proposed introducing “skinny master accounts” for fintech and stablecoin companies. These accounts would allow limited and highly regulated access to the Fed’s payment systems, with strict conditions such as no overdrafts, no interest, and no balance limits.
If implemented, this would be the Fed’s cautious first move toward involvement in the crypto sector, providing access but potentially placing it under tight controls.
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