TLDR
- The US Court of Appeals for the Tenth Circuit rejected Custodia Bank’s rehearing request in a 7-3 decision on Friday
- The Wyoming-chartered bank began pursuing Federal Reserve master account access in October 2020
- Kraken secured a limited master account from the Federal Reserve Bank of Kansas City on March 4, marking a historic first for the crypto industry
- Judge Timothy Tymkovich described master account denial as comparable to “a death sentence” for banking institutions in his dissent
- Federal Reserve officials are developing a comprehensive national framework for “skinny” master accounts targeting crypto companies
The US Court of Appeals for the Tenth Circuit delivered a final blow to Custodia Bank’s legal battle for Federal Reserve master account access. Judges voted 7-3 against the crypto bank’s rehearing petition on Friday.
The Wyoming-chartered institution submitted its original application for master account privileges in October 2020. Master accounts enable financial institutions to maintain reserves directly with the Federal Reserve and utilize its payment infrastructure without relying on intermediary banking relationships.
Custodia faced rejection from the Fed. The bank subsequently initiated legal proceedings, claiming the Monetary Control Act establishes the right of state-chartered banks to access Federal Reserve services.
Court rulings across multiple proceedings have affirmed the Federal Reserve’s authority to exercise discretion when evaluating master account applications. Friday’s decision from the Tenth Circuit Court of Appeals represents the final chapter in Custodia’s legal challenge.
Three judges opposed the majority ruling. Judge Timothy Tymkovich authored a forceful dissenting opinion, characterizing master accounts as “indispensable” to banking operations.
Tymkovich compared the denial of such access to “a death sentence.” His dissent highlighted that the Federal Reserve informed Custodia three months following its application that 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 declined to provide immediate comment on the ruling. Sources familiar with the institution’s operations indicated the bank continues exploring alternative pathways to access.
Kraken Gets First Crypto Master Account
The judicial setback arrived mere days following a significant breakthrough for the crypto banking sector. The Federal Reserve Bank of Kansas City approved Kraken for a limited master account on March 4 — establishing a precedent as the inaugural crypto company to receive such authorization.
Kraken’s approved account provides connectivity to the Fedwire payments network. The arrangement excludes certain comprehensive services available to conventional banking institutions, while maintaining access to essential core capabilities.
Fed Working on Wider Crypto Policy
The Federal Reserve’s national board currently advances development of guidelines governing “skinny” master accounts. These frameworks would presumably mirror the limited access structure exemplified by Kraken’s arrangement with the Kansas City branch.
The policy formulation remains in preliminary phases. Timeline details for when crypto banking firms might submit applications under revised guidelines remain undisclosed.
Industry analysts anticipate additional crypto companies may pursue the pathway established by Kraken, though experienced observers caution that approval rates will progress gradually. The speed of approvals may vary significantly based on which regional Federal Reserve bank receives applications.
The Federal Reserve’s forthcoming nationwide framework could establish standardized procedures for crypto firms pursuing direct access to central bank payment infrastructure.
