rules
A federal court in Denver dealt a significant blow to Custody Bank, a Wyoming-based digital asset institution that had sought direct access to the Federal Reserve’s payment system.
in ruling In a move that could shape the future relationship between crypto banks and traditional financial regulators, the 10th Circuit Court of Appeals upheld the Fed’s right to deny master account privileges to financial institutions it deems risky, even if they meet basic eligibility criteria.
The collision of innovation and surveillance
Custodia’s lawsuit, originally filed in 2022, argued that the Federal Reserve is obligated to offer master accounts to all eligible banks, including state-chartered banks like its own. A master account would allow custodians to interact directly with the Fed’s clearing and settlement systems, bypassing intermediary banks and enabling faster and more efficient payments to crypto-related businesses.
But the appellate judges disagreed, concluding that while Custody may technically qualify as a depository institution under federal law, local branches of the Federal Reserve Board retain complete discretion over which applicants to approve. Justice David Ebell, appointed during the Reagan administration, wrote for the majority, saying that granting automatic access would “remove important safeguards” designed to protect the broader banking system from operational and liquidity risks.
The decision effectively confirms that the Fed can deny access to institutions with nontraditional or high-risk business models, such as those deeply involved in storing or trading cryptocurrencies. The ruling cited previous findings by the Kansas City Federal Reserve Bank that found Custodea’s cryptocurrency-intensive operations posed an “undue risk” to the stability of the U.S. financial sector.
Divisive decision reflecting widespread tensions
Two justices agreed to uphold the lower court’s dismissal, but one panel member, Judge Timothy Timkovich, appointed by President George W. Bush, dissented. Timkovic argued that the legal language governing master accounts is clear and that eligible non-member banks should not face discrimination or selective denial. He argued that allowing the Fed to decide winners and losers among banks would undermine fair competition and stifle innovation within the financial system.
Legal experts say the split decision highlights a widening ideological divide in U.S. financial regulation, pitting the Fed’s cautious approach to digital assets against industry demands for a level playing field. “This wasn’t just about custodians,” said Melissa Hsu, a financial law professor at Georgetown University. “It depends on whether crypto-native banks have equal access to the rails that move money in America.”
Ripple effects on the crypto banking sector
The ruling is the latest setback in a long battle between crypto companies and U.S. financial gatekeepers. Founded by former Morgan Stanley executive Caitlin Long, Custodea was one of several digital asset institutions exploring a state-regulated route into the traditional banking system through Wyoming’s Special Purpose Depository Institution (SPDI) framework.
These SPDIs are designed to operate under strict capital requirements and transparency rules while providing digital asset custody and settlement services. But without access to the Fed’s master accounts, its ability to compete with federally chartered banks remains limited.
Custodia’s loss could deter other blockchain-focused banks from filing similar lawsuits, at least for now. “This decision will keep crypto banking in a continuing pattern,” Su said. “Unless there is clearer federal guidance or policy shifts, these agencies will continue to operate on the edge.”
Is broader policy change on the horizon?
The ruling strengthens the Fed’s authority, but the regulatory landscape could change in the coming years. Chairman Jerome Powell’s term is coming to an end, and speculation is mounting that his successor, likely to be appointed by the current administration, may take a more accommodative stance on digital assets. Some policymakers have argued that consolidating crypto institutions under Fed oversight could increase oversight rather than increase systemic risk.
Major companies in the crypto sector, including Ripple, have already echoed Custodia’s arguments and are calling for a path to mastering account access that does not exclude blockchain-based companies. They argue that incorporating crypto banks into the Fed’s ecosystem will reduce the risk of shadow banking and give regulators greater visibility into the flow of digital assets.
The tipping point for cryptocurrencies and central banks
For now, the court’s ruling solidifies the Fed’s position as the ultimate gatekeeper between traditional finance and the crypto economy. Custodia’s next move, whether an appeal to the Supreme Court or a strategic shift in its business model, will be closely watched by an industry that sees institutional access as the last barrier to legitimacy.
“This case was not just about one bank,” said economist Daniel Crane. “It was about defining the boundaries of innovation within the U.S. financial system. The Fed made it clear that cryptocurrencies were still outside its walls, at least for now.”
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