TLDR
- The US Court of Appeals for the Tenth Circuit denied Custodia Bank’s rehearing petition in a 7-3 decision on Friday
- The Wyoming-based crypto bank has pursued Federal Reserve master account access since October 2020
- On March 4, Kraken made history as the first cryptocurrency company to obtain a limited master account from the Federal Reserve Bank of Kansas City
- A dissenting judge compared master account denial to imposing “a death sentence” on financial institutions
- Federal Reserve officials are developing nationwide guidelines for “skinny” master accounts tailored to crypto companies
A federal appeals court has delivered a final blow to Custodia Bank’s prolonged legal battle for Federal Reserve access. The US Court of Appeals for the Tenth Circuit rejected the cryptocurrency-focused bank’s rehearing request in a 7-3 vote on Friday.
The bank, which operates under a Wyoming charter, submitted its initial master account application in October 2020. Master accounts enable financial institutions to maintain reserves directly with the Federal Reserve and utilize its payment infrastructure without intermediary banks.
After the Federal Reserve denied the application, Custodia initiated legal proceedings. The bank’s argument centered on the Monetary Control Act, which it claimed guarantees state-chartered banks statutory rights to Federal Reserve services.
Successive court rulings have affirmed the Federal Reserve’s authority to exercise discretion when evaluating master account applications. Friday’s appellate court decision definitively settles this legal question.
The decision wasn’t unanimous. Judge Timothy Tymkovich authored a forceful dissenting opinion, characterizing master accounts as “indispensable” to standard banking operations.
In his dissent, Tymkovich stated that denial of such access is “akin to a death sentence.” He highlighted that just three months following Custodia’s application submission, Federal Reserve officials informed the bank there were “no showstoppers” preventing approval.
He wrote: “Holding that the Reserve Banks have unreviewable discretion over master accounts places us on the wrong side of the statutes and, likely, that of the Constitution.”
Custodia Bank has not issued an immediate statement regarding the decision. Sources with knowledge of the institution’s operations indicate it continues exploring alternative pathways to access.
Kraken Gets First Crypto Master Account
The adverse ruling arrives mere days after a groundbreaking development in the cryptocurrency banking sector. The Federal Reserve Bank of Kansas City approved Kraken for a limited master account on March 4 — marking an unprecedented first for a cryptocurrency company.
Kraken’s approved account provides connectivity to the Fedwire payments network. While it doesn’t encompass the complete suite of services available to conventional banks, it delivers many essential banking capabilities.
Fed Working on Wider Crypto Policy
The Federal Reserve Board is actively formulating policies for “skinny” master accounts. These restricted accounts would presumably mirror the framework established by Kraken’s limited account approval in Kansas City.
This policy development remains in preliminary phases. The timeline for when cryptocurrency banks can submit applications under the forthcoming framework remains undetermined.
Industry analysts anticipate additional crypto companies may pursue similar arrangements following Kraken’s breakthrough, though seasoned observers caution that approval processes will advance gradually. The speed of approvals may vary significantly depending on which regional Federal Reserve bank handles each application.
Once the Federal Reserve completes its nationwide policy framework, crypto firms should have a more standardized pathway for obtaining direct access to the central bank’s payment infrastructure.
