TLDR
- The US Court of Appeals for the Tenth Circuit dismissed Custodia Bank’s last appeal regarding Federal Reserve master account access in a 7-3 ruling
- The Wyoming-based bank has pursued master account approval since October 2020
- On March 4, Kraken made history as the first cryptocurrency company to obtain a limited master account from the Kansas City Federal Reserve Bank
- A dissenting judge compared master account denial to “a death sentence” for banking institutions
- The Federal Reserve is developing a comprehensive “skinny” master account framework for cryptocurrency companies
The legal battle between Custodia Bank and the Federal Reserve has reached its conclusion. In a Friday ruling, a US federal appeals court rejected the cryptocurrency-focused bank’s rehearing request by a 7-3 margin.
The Wyoming-based financial institution initially submitted its master account application in October 2020. Master accounts enable banking entities to maintain reserves directly with the Federal Reserve and utilize its payment infrastructure without intermediary banks.
When the Fed denied Custodia’s request, the bank pursued legal action, contending that the Monetary Control Act guarantees state-chartered banks access to Federal Reserve services.
Successive court decisions have affirmed that the Federal Reserve maintains discretionary authority over master account approvals. The latest ruling from the US Court of Appeals for the Tenth Circuit definitively settles this legal dispute.
The decision wasn’t unanimous. Three judges opposed the ruling. Judge Timothy Tymkovich authored a forceful dissent, characterizing master accounts as “indispensable” for standard banking functions.
Tymkovich further stated that denial is “akin to a death sentence.” He noted that just three months following Custodia’s application submission, the Fed informed the institution there were “no showstoppers” preventing approval.
He stated: “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 hasn’t issued an immediate statement regarding the decision. Sources close to the institution indicate it continues exploring alternative pathways to secure access.
Kraken Gets First Crypto Master Account
This legal setback arrives mere days following a significant breakthrough 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 achievement for a crypto company.
Kraken’s approved account provides connectivity to the Fedwire payments network. While it doesn’t encompass the complete service suite available to conventional banks, it includes numerous essential capabilities.
Fed Working on Wider Crypto Policy
The Federal Reserve’s national board is currently formulating guidelines for “skinny” master accounts. These accounts would presumably mirror the limited access model granted to Kraken by the Kansas City branch.
This policy development remains in preliminary phases. The timeline for when cryptocurrency banks can submit applications under the new framework remains undetermined.
Industry analysts suggest additional crypto companies may pursue Kraken’s approach, though experts monitoring the sector anticipate a gradual approval process. Approval speed may vary depending on which regional Federal Reserve bank receives applications.
Once the Fed’s national policy framework is complete, it could establish more uniform procedures for cryptocurrency firms pursuing direct Federal Reserve payment system access.
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