Key Takeaways
- Federal appeals court denied Custodia Bank’s rehearing request in a 7-3 decision on Friday
- The Wyoming bank’s quest for Federal Reserve master account access began in October 2020
- Kraken secured the crypto industry’s first limited master account from Kansas City’s Federal Reserve Bank on March 4
- Dissenting judge described master account denial as essentially a “death sentence” for banking institutions
- Federal Reserve develops uniform “skinny” master account framework for cryptocurrency companies
The US Court of Appeals for the Tenth Circuit has delivered what appears to be the final blow to Custodia Bank’s legal battle for Federal Reserve master account access. In a 7-3 vote Friday, the court rejected the cryptocurrency-focused bank’s petition for a rehearing.
Custodia, which operates under a Wyoming state charter, submitted its master account application back in October 2020. Master accounts provide financial institutions with the ability to maintain reserves directly with the Federal Reserve and utilize its payment infrastructure without relying on intermediary banking relationships.
The Federal Reserve denied Custodia’s request. In response, Custodia pursued legal action, contending that the Monetary Control Act guarantees state-chartered banking institutions statutory rights to Federal Reserve services.
Successive court rulings have affirmed the Fed’s authority to exercise discretion when evaluating master account applications. The latest decision from the Tenth Circuit effectively terminates Custodia’s legal options.
Three judges issued dissenting opinions. In a particularly forceful dissent, Judge Timothy Tymkovich characterized master account access as essential for standard banking operations.
Tymkovich further stated that denial amounts to a “death sentence” for any bank. He highlighted that just three months following Custodia’s submission, Federal Reserve officials informed the institution that “no showstoppers” existed regarding its application.
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 has not issued an immediate statement regarding the decision. Sources close to the bank indicate it continues exploring alternative pathways to secure access.
Kraken Achieves Milestone With First Crypto Master Account
This courtroom setback arrives mere days following a significant breakthrough elsewhere in the sector. The Federal Reserve Bank of Kansas City approved Kraken for a limited master account on March 4 — marking an unprecedented achievement for a cryptocurrency company.
Kraken’s newly granted account provides integration with the Fedwire payments infrastructure. While it doesn’t encompass the complete service portfolio available to conventional banks, it delivers numerous essential banking capabilities.
Federal Reserve Develops Broader Crypto Framework
The Federal Reserve’s national board is currently crafting policy guidelines for “skinny” master accounts. These limited accounts would presumably mirror the restricted access model granted to Kraken by the Kansas City regional bank.
This policy development remains in preliminary phases. The timeline for when cryptocurrency banking institutions may submit applications under this emerging framework remains undetermined.
Industry analysts suggest additional crypto companies may pursue the route Kraken has pioneered, though veteran observers caution that approval processes will likely move gradually. The speed of approvals may vary significantly depending on which regional Federal Reserve bank receives the application.
Once the Fed’s comprehensive national policy reaches completion, it could establish standardized procedures for cryptocurrency firms pursuing direct integration with the central banking system’s payment infrastructure.
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