Custodia Seeks Full Court Review to Challenge Fed's Master Account Denial

Custodia Bank, a Wyoming-based cryptocurrency custody bank, has filed for a rare en banc review with the U.S. Court of Appeals for the Tenth Circuit. The move aims to overturn a previous ruling that upheld the Federal Reserve's denial of a master account, a critical financial tool for operating a national bank. The bank argues that the decision undermines state banking authority and raises constitutional concerns about the Fed's discretion over access to central bank services according to financial reports.

This legal challenge comes after years of repeated rejections from the Federal Reserve. Custodia, which operates under a special purpose depository institution (SPDI) charter from Wyoming, has been seeking a master account since 2020.

Without it, the bank must rely on correspondent banks to access the Fed's payment systems, increasing costs and operational risks.

The Tenth Circuit panel that initially ruled in October consisted of two judges who supported the Fed's discretion and one dissenting voice. Judge Timothy Tymkovich, the lone dissenter, argued that the Fed's claim to unreviewable discretion over master accounts raised serious constitutional questions. Custodia's new petition seeks a full rehearing by all 19 active judges on the court, emphasizing the case's broader implications for state-chartered institutions and federal banking authority.

Why the Standoff Happened

Custodia's battle with the Federal Reserve centers on the interpretation of the Monetary Control Act (MCA) of 1980. The bank argues that the Act mandates access to Fed services for eligible depository institutions, including state-chartered banks like itself. However, the Fed maintains that it has discretion to deny master accounts if it deems an institution a risk to financial stability. The three-judge panel ruled in favor of the Fed, stating that the central bank retains the authority to safeguard the U.S. financial system by limiting access.

Custodia challenges this interpretation, claiming the panel misread the MCA. The bank argues that language in the law stating services "shall be available" means access is mandatory, not optional. This dispute has become a flashpoint for a larger debate about the balance of power between federal and state regulators in the evolving crypto banking sector. If the Fed can unilaterally deny access to legally chartered institutions, the argument goes, state-level innovation in financial services could be stifled.

Risks to the Outlook

The outcome of this legal battle could set a significant precedent for other crypto-focused banks and financial institutions seeking access to Fed services. Currently, no crypto-native bank has been granted a master account, despite growing regulatory clarity in certain areas. For example, the Office of the Comptroller of the Currency recently issued guidance allowing national banks to conduct riskless principal crypto transactions, signaling a more welcoming stance toward digital assets. However, access to central bank payment systems remains a hurdle.

Custodia's legal team warns that without a master account, state-chartered crypto banks are effectively denied the ability to operate at scale. The bank cites concerns over operational viability, noting that the use of correspondent banks introduces inefficiencies and limits the ability to process transactions in real-time. The case also highlights broader issues within the financial system, including allegations of "debanking" where traditional institutions exclude crypto-related businesses under anti-money laundering rules.

What This Means for Investors

For investors and market participants, the outcome of this case could influence the regulatory trajectory of the crypto banking sector. A favorable ruling for Custodia might encourage more states to experiment with crypto-friendly banking models, potentially increasing competition and innovation. Conversely, a decision upholding the Fed's discretion could reinforce the central bank's gatekeeper role, making it more difficult for new entrants to establish themselves in the national financial system.

Meanwhile, Federal Reserve officials have acknowledged the importance of providing tailored access to crypto banks. Governor Christopher Waller has suggested the Fed could create "skinny" master accounts with limited access for institutions that meet certain criteria. However, these proposals remain subject to the Fed's discretion, and no final rules have been implemented. Investors and industry participants will be closely watching whether the full Tenth Circuit agrees to rehear the case and, if so, how it might reshape the landscape for crypto banking in the United States.