The Tenth Circuit Court of Appeals on 13 Mar declined to reconsider Custodia Bank’s challenge to the Federal Reserve’s denial of a master account, dealing another setback to the lender. This reinforces the central bank's discretion over which institutions can access its payment system.
The court rejected Custodia's petition for a rehearing by the full court, leaving intact an earlier ruling that sided with the Federal Reserve and the Federal Reserve Bank of Kansas City. After circulating the request among active judges, the court said the poll did not carry, effectively denying the decision.
Custodia's legal fight over Fed access
Custodia applied for a master account with the Kansas City Fed in October 2020. Such accounts allow banks to hold deposits directly at the Federal Reserve and access core services including payment clearing and Fedwire transfers. Without one, financial institutions must rely on intermediary banks to interact with the Fed’s payment rails.
The bank is chartered in Wyoming and argued that federal law requires Reserve Banks to provide payment services to eligible depository institutions, citing that access to those services necessarily requires a master account.
Debate over Fed authority
Two judges dissented from the decision not to rehear the case, arguing that the issue raised significant legal and constitutional questions. In a dissent, Judge Timothy Tymkovich said the question at the heart of the case was "whether Congress has given the Federal Reserve Banks unfettered discretion to deny a state-chartered bank’s master account application."
Without a master account, "a bank cannot operate in the modern banking system," Tymkovich wrote, warning that allowing Reserve Banks to deny accounts without review could effectively give federal authorities a veto over banks chartered by US states.
Kraken approval adds contrast
The ruling comes as another crypto institution recently secured the type of access Custodia has spent years seeking. On 4 Mar, the Fed of Kansas City granted crypto exchange operator Kraken a master account through its banking arm Payward Financial.
The approval drew sharp criticism from US banking groups, which argued the Fed acted before completing a formal rulemaking process. While Custodia ultimately pursued its fight through the courts, Kraken obtained access through the Federal Reserve's supervisory process, highlighting the divergent outcomes for firms seeking to bridge the gap between digital assets and traditional rails.
