Federal Court Upholds Fed's Discretion Over Payment System Access

An appeals court has affirmed the Federal Reserve's refusal to grant Custodia Bank access to a master account, closing another legal avenue for the crypto-focused bank to connect directly to the central bank's payment infrastructure. The 10th Circuit Court of Appeals ruled on Friday that the Fed retains discretion to reject master account applications, even from eligible institutions like Wyoming's special purpose depository institutions (SPDIs) . The decision upholds a 2023 ruling by U.S. District Judge Scott Skavdahl in Wyoming, which found no legal obligation for the Fed to approve Custodia's request .

Custodia, founded by former Morgan Stanley executive Caitlin Long, has argued for years that its Wyoming charter-a framework requiring 100% reserve coverage for customer deposits-qualifies it for a master account under existing statutes. The bank's legal battle began in 2022 after the Federal Reserve Board of Governors stalled its application, which was initially submitted in 2020 . In its appeal, Custodia contended that the Fed's refusal stifles competition and innovation in digital banking. However, the appeals court emphasized that the "plain language" of the Federal Reserve Act grants the central bank authority to safeguard the financial system by selectively approving access .

The ruling reinforces the Fed's stance that master accounts are not automatic rights but tools to manage systemic risk. A three-judge panel noted that the Fed's discretion is critical to maintaining stability, particularly as it weighs risks associated with new financial technologies. "We reject Custodia's attempt to impair the Fed's ability to safeguard our nation's financial system," the opinion stated . This aligns with recent remarks by Fed Governor Christopher Waller, who proposed a "skinny master account" framework for limited-access entities focused on payments innovation. Such accounts would restrict participants from accessing the full suite of Fed services, including interest-bearing balances and discount window borrowing, to mitigate risk .

For Custodia, the decision leaves few options beyond its current reliance on intermediary banks for Fed access. The bank's statement following the ruling acknowledged the setback but highlighted a strong dissent from some judges, suggesting a potential avenue for future challenges. "While we were hoping for a win at the [10th] Circuit today, we received the next best thing-a strong dissent," Custodia wrote on X . However, legal experts view the outcome as a significant hurdle for state-chartered crypto banks seeking parity with traditional institutions. Wyoming's SPDI model, while designed to accommodate crypto custody, remains unaccepted by the Fed due to concerns over systemic exposure .

The case underscores broader tensions between state-level innovation and federal oversight. While states like Wyoming have pioneered crypto-friendly regulations, the Fed's centralized control over payment rails ensures that new entrants must navigate stringent federal standards. Waller's "skinny account" proposal, though not a direct win for Custodia, signals cautious openness to fintech participation. However, as the appeals court's decision makes clear, judicial compulsion of the Fed to expand access is unlikely absent legislative action .

Investors and crypto advocates will now watch for alternative solutions, including potential legislative reforms or private-sector innovations. For now, Custodia's struggle reflects the challenges of integrating crypto infrastructure into the U.S. financial system-a process that remains tightly governed by federal discretion.