TLDR
- The US Court of Appeals for the Tenth Circuit denied Custodia Bank’s rehearing request regarding Federal Reserve master accounts with a 7-3 decision
- The Wyoming bank has pursued Federal Reserve master account access for over four years, beginning in October 2020
- On March 4, Kraken achieved a historic milestone by obtaining a limited master account from the Kansas City Federal Reserve Bank, marking the first such approval for any cryptocurrency company
- A dissenting appellate judge characterized master account denial as equivalent to “a death sentence” for banking institutions
- Federal Reserve officials are currently developing comprehensive nationwide guidelines for restricted “skinny” master accounts targeting cryptocurrency companies
The Wyoming-based Custodia Bank has exhausted its legal options in the battle for Federal Reserve master account access. On Friday, a federal appeals court delivered a 7-3 decision rejecting the cryptocurrency-focused bank’s petition for a rehearing.
Custodia submitted its initial master account application to the Federal Reserve in October 2020. Master accounts provide financial institutions with the capability to maintain reserves directly with the Federal Reserve and utilize its payment infrastructure without relying on intermediary banking relationships.
After the Fed denied Custodia’s request, the bank initiated legal proceedings against the central bank. Custodia’s legal argument centered on the Monetary Control Act, which the bank claims grants state-chartered financial institutions an explicit right to Federal Reserve services.
Several courts have consistently affirmed that the Federal Reserve maintains discretionary authority when determining master account eligibility. The latest ruling from the US Court of Appeals for the Tenth Circuit definitively settles this legal question.
Three appellate judges issued dissenting opinions. Judge Timothy Tymkovich authored a forceful dissent, characterizing master account access as “indispensable” for fundamental banking operations.
Tymkovich further stated that denial of such access is “akin to a death sentence.” His opinion highlighted that just three months following Custodia’s application submission, Federal Reserve officials 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 has not issued an immediate statement regarding the decision. Sources close to the institution indicate the bank continues exploring alternative pathways to secure access.
Kraken Gets First Crypto Master Account
This judicial setback arrives mere days following a significant breakthrough in the cryptocurrency banking sector. The Federal Reserve Bank of Kansas City approved [[LINK_START_0]]Kraken[[LINK_END_0]] for a limited master account on March 4 — representing the cryptocurrency industry’s inaugural approval.
Kraken’s newly granted account provides connection to the Fedwire payments infrastructure. While lacking the comprehensive service suite available to conventional banks, it incorporates numerous essential banking capabilities.
Fed Working on Wider Crypto Policy
The Federal Reserve Board is actively formulating policy frameworks for what officials describe as “skinny” master accounts. These restricted accounts would presumably mirror the limited access structure granted to Kraken’s Kansas City arrangement.
This policy development remains in preliminary phases. Federal Reserve officials have not announced a timeline for when cryptocurrency banking institutions can submit applications under the forthcoming framework.
Industry experts anticipate additional cryptocurrency companies may pursue similar arrangements following Kraken’s breakthrough, though experienced observers caution that approval processes will likely proceed cautiously. The speed of approvals may vary significantly depending on which regional Federal Reserve bank processes each application.
Once the Federal Reserve completes its nationwide policy framework, cryptocurrency firms could benefit from more standardized procedures for obtaining direct connectivity to the central bank’s payment infrastructure.
