Custodia Bank’s Final Court Appeal Regarding Federal Reserve Master Account Denied

A federal appeals court in the United States has dismissed Custodia Bank’s last effort to contest the Federal Reserve’s power regarding the issuance of master accounts, concluding the crypto-oriented bank’s five-year legal battle for direct entry into the central bank’s payment system.

Key Takeaways:

• A US appeals court declined to consider Custodia Bank’s final appeal, marking the end of its five-year struggle for a Federal Reserve master account.
• Judicial rulings affirmed that the Federal Reserve has the authority to determine which entities can access its payment network.
• This case arises as an increasing number of fintech and crypto companies seek US bank charters and direct access to the banking infrastructure.

The US Court of Appeals for the Tenth Circuit announced in a filing on Friday that it would not entertain Custodia’s final appeal in a 7–3 decision, effectively concluding the matter and affirming the Federal Reserve’s authority over access to its banking services.

Custodia Contended Fed Must Provide Master Account to State-Chartered Banks

Custodia initially sought a Federal Reserve master account in October 2020.

These accounts enable financial institutions to maintain reserves directly at the central bank and connect to its payment systems, allowing banks to settle transactions independently of intermediary entities.

Following the denial of its application, Custodia escalated the issue to the courts, asserting that the Monetary Control Act mandates the Fed to offer services to state-chartered banks, thereby entitling it to a master account.

The bank argued that access to the central bank’s payment system was essential for its operations as a digital asset-focused entity.

Nevertheless, courts examining the case consistently sided with the Federal Reserve, determining that the central bank possesses discretion in deciding whether to issue master accounts.

denial of @custodiabank’s fed membership & master account on concerns of “safety and soundness” looks a bit absurd right now
custodia was to be a non-lending fully reserved depository with its cash in a fed account. no asset-liability mismatch, no duration risk @CaitlinLong_

— Alex Thorn (@intangiblecoins) March 10, 2023

This ruling comes shortly after the crypto exchange Kraken obtained a limited form of direct access to the Federal Reserve system.

On March 4, Kraken became the first cryptocurrency platform to secure a master account from the Federal Reserve Bank of Kansas City.

Kraken’s account permits the firm to connect to the Fedwire payments network, although it does not provide the complete range of services typically accessible to conventional banks.

This development has led to speculation that US regulators may contemplate issuing “skinny” or restricted master accounts to crypto firms aiming for closer integration with the banking system.

Despite the unfavorable ruling for Custodia, one judge expressed a strong dissent. Judge Timothy Tymkovich stated that access to a master account is “indispensable” for banks and characterized the denial as “akin to a death sentence.”

Tymkovich pointed out that shortly after Custodia submitted its application in 2020, the Federal Reserve initially suggested that the proposal had “no showstoppers.”

He further expressed disagreement with the majority’s perspective that reserve banks have extensive discretion over such applications.

Revolut Submits Second Application for US Bank Charter to Broaden Operations

The fintech firm Revolut has submitted a new application for a US national bank charter, representing its second effort to secure a banking license in the nation.

The London-based company filed the application with the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) to establish “Revolut Bank US, N.A.”

If granted, the charter would enable Revolut to function under a unified federal regulatory framework across all 50 US states.

Revolut’s initiative coincides with a growing number of fintech and crypto companies pursuing US bank charters through the OCC.

Recent applicants for national bank charters include Nubank, Crypto.com, Circle, Ripple, BitGo, Fidelity Digital Assets, and Paxos, indicating an increasing interest among fintech and digital asset firms in obtaining direct access to the US banking system.

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