U.S. Court of Appeals Backs Fed’s Decision to Deny Custodian Bank a Master Account

A federal appeals court in Denver has upheld the Federal Reserve’s right to deny crypto-focused Custodia Bank access to a master account, dealing a blow to the Wyoming-based institution’s years-long effort to gain direct access to the U.S. central banking system.

In a 2-1 decision, the Tenth Circuit Court of Appeals agreed with a lower court that the Fed has discretion to decide which financial institutions can hold master accounts, which allow direct access to Fed services such as payment clearing and wire transfers.

The court concluded that even if Custodia is technically eligible, eligibility does not guarantee entitlement.

Judge says Fed has right to deny custody to ‘safeguard financial system’

Speaking for the majority, Justice David Ebel, appointed by former President Ronald Reagan, said the law gives the Fed the authority to “reject requests for primary account access from eligible entities” to protect financial stability.

“We reject Custodia’s attempt to undermine the Fed’s ability to protect our nation’s financial system through the exercise of its discretion,” Ebel wrote.

Custodia, which operates under Wyoming’s Special Purpose Depository Institution (SPDI) charter, argued that it was unfairly excluded from the national banking network despite meeting the necessary criteria.

The Federal Reserve Bank of Kansas City, however, determined that Custodia’s business model, centered on the custody and settlement of crypto assets, posed “excessive risk” to the financial system as a whole.

In a dissenting opinion, Judge Timothy Tymkovich, appointed by President George W. Bush, argued that the Fed’s own statutes require it to provide payment services to all eligible nonmember banks, including Custodia.

“This case is presented in 21st century terms: cryptocurrency, digital assets, instant wire transfers, and master accounts,” he wrote. “But there is nothing new in this question.”

Custodia called the decision “disappointing” but pointed to Tymkovich’s dissent as validation of his position.

“We were hoping for a victory at the Tenth Circuit today, but we received the next best thing: a strong dissent,” the bank said, adding that it may request a rehearing based on a conflicting ruling in a related case.

The decision leaves Custodia and other crypto-focused financial institutions still without direct access to US payments infrastructure. So far, no crypto-focused bank has received a master account.

Fed Governor Launches “Skinny” Master Accounts for Crypto-Focused Banks

Notably, the regulatory landscape could soon change.

As reported, the Federal Reserve plans to open its payments network to stablecoin issuers and fintech companies without requiring them to partner with traditional banks, a significant policy reversal after years of hesitancy toward crypto.

Fed Governor Christopher Waller announced the proposal last week at the central bank’s Payments Innovation Conference on October 21, introducing new “payment accounts” or “lean master accounts” for legally eligible institutions.

These restricted accounts would connect businesses directly to the Fed’s payment channels while maintaining strict safeguards to reduce systemic risk.

Under the proposal, participating companies would face balance caps, no interest on deposits and no overdraft privileges, ensuring minimal exposure to the Fed’s balance sheet.

Waller said the new structure aims to keep the central bank competitive through rapid payments innovation.

U.S. Court of Appeals Backs Fed’s Decision to Deny Custodian Bank a Master Account appeared first on Cryptonews.

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