Court concludes Custodia dispute with Federal Reserve as the Fed initiates access to master accounts.

Just days after the Federal Reserve provided a limited master account to Kraken, the lengthy legal struggle of crypto bank Custodia against the Fed ends in a setback.

Founder and CEO Caitlin Long’s Custodia Bank faced unfavorable news from a U.S. court. (CoinDesk archives)

What to know:

• A federal court dismissed Custodia Bank’s plea to assess the Federal Reserve’s authority regarding master accounts.
• However, the crypto bank’s dismissal coincides with emerging opportunities for access to limited master accounts.
• A regional Federal Reserve bank has provided Kraken such access, while the national Fed board is developing a policy to facilitate similar arrangements.

A federal appeals court turned down Custodia’s last attempt to contest the U.S. Federal Reserve’s jurisdiction over master account grants, although this ruling comes as the central bank is exploring alternative pathways for these accounts.

A Fed master account enables access to the central bank’s payment systems and comprehensive services, allowing an institution to bypass intermediary arrangements, making it highly desirable for new crypto banks like Wyoming-chartered Custodia Bank. The bank has been engaged in a prolonged dispute with the Fed regarding the initial denial of its master account application and later on whether the Fed should possess the ultimate authority to grant such access.

The U.S. Court of Appeals for the 10th Circuit announced on Friday that it has refused to consider Custodia’s final appeal on this matter with a 7-3 vote. Nevertheless, this latest in a series of legal setbacks occurs as the Fed appears to be creating new opportunities for crypto firms to obtain master accounts.

Recently, a regional bank, specifically the Federal Reserve Bank of Kansas City, has provided crypto exchange Kraken with a unique limited account. While not a full master account, it includes several of the same features, making Kraken the first crypto entity to receive such an account for its banking division.

Simultaneously, the national Federal Reserve board is formulating a new policy to accommodate crypto firms and others with what are referred to as “skinny” master accounts, likely mirroring Kansas City’s model. This initiative is still in its preliminary phases, and the timeline for when crypto banks can start applying remains uncertain.

Custodia representatives did not provide an immediate response regarding Friday’s court ruling. An individual familiar with the bank’s situation indicated on Friday that they are still seeking access.

In a dissenting opinion circulated by the court, one judge expressed reasons why a rehearing should have been granted. Judge Timothy Tymkovich 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 as well. The case’s consequences for the financial industry and its impact on the state-federal balance in banking regulation make it exceptionally important.”

The success of Kraken has led analysts to speculate that other crypto firms may soon find themselves on the list of entities with master accounts. However, observers of the lengthy legal conflict suggest that progress will be gradual and contingent on the specific regional reserve bank system in question. A broader wave of approvals may depend on the Fed’s establishment of a nationwide policy for limited accounts.

Read More: Crypto bank Custodia files petition for a rehearing by all appellate judges