Custodia Bank Loses Federal Reserve Master Account Appeal

US Court Decision on Custodia Bank Federal Reserve Master Account

The United States Court of Appeals for the Tenth Circuit has ruled against Custodia Bank in its effort to secure a Federal Reserve master account, a development with significant implications for the crypto banking sector. The decision, announced on Friday, June 14, 2024, upholds an earlier ruling by the District of Wyoming and marks another setback for the crypto-friendly institution founded by Caitlin Long. The appellate court stated that legal challenges surrounding the Federal Reserve’s authority and regulations date back to the founding of the central bank, despite the modern context involving cryptocurrency and digital assets.

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Background of the Fed Master Account Dispute

Custodia Bank, formerly known as Avanti, was established with a focus on serving digital asset clients under favorable state regulations in Wyoming. The bank submitted its application for a Federal Reserve master account in October 2020, which would have enabled it to access the core payments network shared by US government entities and federally authorized financial institutions.

The Federal Reserve Bank of Kansas City denied Custodia’s application in 2023, citing risks that were “inconsistent with safe and sound banking practices” given Custodia’s emphasis on crypto assets. Prior to the formal rejection, Custodia had initiated a lawsuit in 2022, alleging an “unlawful delay” in how the Federal Reserve processed its application. After the lower court sided with the Federal Reserve, Custodia appealed the decision in April 2024, leading to last week’s ruling.

Market Reaction and Custodia’s Response

The denial of a Federal Reserve master account prevents Custodia Bank from obtaining direct access to critical US interbank payment systems, a step seen as essential for broader integration of crypto-focused banks. In response to the appellate court’s decision, Custodia stated on X (formerly Twitter) that it is “actively considering” seeking a rehearing before the court, indicating continued legal efforts.

Caitlin Long, founder of Custodia Bank, has not yet issued a public statement regarding the ruling. The decision is viewed as reflective of ongoing regulatory scrutiny facing digital asset institutions seeking a more conventional role in the US financial system.

What’s Next for Crypto Banking and Regulation?

The court’s affirmation underscores significant challenges for crypto banks aiming to access the US federal payments network. The ruling is likely to affect other similar institutions operating in states with favorable digital asset legislation, highlighting the disconnect between state-level innovation and federal regulatory constraints.

Should Custodia Bank pursue a rehearing or take further legal action, the case could set additional precedents regarding the treatment of digital asset banks within the US financial system. The outcome will be closely monitored by stakeholders in the broader cryptocurrency industry and traditional banking sectors alike.