Caitlin Long's Custodia Bank, a Wyoming-based digital asset bank, has lost its appeal in a legal battle against the Federal Reserve (Fed) over access to a master account. The U.S. Court of Appeals for the Tenth Circuit upheld a previous ruling, affirming the Federal Reserve Bank of Kansas City's authority to deny Custodia Bank's application for a "master account". This decision marks a setback for the crypto bank, which has been seeking direct access to the Fed's payment system for years.
The court's decision highlights the ongoing tension between innovative financial institutions and federal banking regulators regarding access to central banking services. A master account would grant Custodia direct access to the Fed's payment systems, streamlining transactions and reducing costs by eliminating the need for intermediary banks. Without it, Custodia is forced to rely on partner banks with master accounts to provide services.
Custodia, founded by Caitlin Long, applied for a master account with the Federal Reserve Bank of Kansas City in 2020. In 2022, the bank sued the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City, alleging delays in processing its application. The Fed ultimately declined Custodia's application, citing concerns about the bank's risk management and controls related to its digital asset-focused business model. Federal officials argued that granting Custodia access would introduce undue risk into the Fed's payment systems.
Custodia argued that the Fed's rejection hinders competition and innovation in the digital banking sector. The bank asserted that under the nation's dual banking system, the Federal Reserve Bank of Kansas City could not reject a legally state-chartered bank's application for a master account. However, Judge Scott Skavdahl rejected that reasoning.
The appeals court ruling emphasized the Federal Reserve's discretion in granting master accounts to financial institutions. The court stated that granting Custodia a master account would "impair the Fed's ability to safeguard our nation's financial system". The judges affirmed that Custodia is not automatically entitled to a master account. The court emphasized that the "plain language" of the Federal Reserve Act grants the central bank authority to safeguard the financial system by selectively approving access.
Judge Timothy Tymkovich, dissenting from the majority, argued that the Fed has managed risky banks with master accounts for years and that traditional banks can be just as risky as innovative ones. He suggested that the Fed's concerns could be addressed through policy innovation rather than denying access to innovative banks.
Custodia Bank expressed disappointment with the ruling but noted the "strong dissent," and is considering petitioning for a rehearing. The split decision means Custodia could appeal to have the full Tenth Circuit review the case. Senator Cynthia Lummis called the decision disappointing, stating that the Federal Reserve's inaction in issuing master accounts is unacceptable.
The ruling underscores the Federal Reserve's authority in determining which institutions qualify for direct access to the central banking system. This decision is the latest development in a long-standing dispute over the Fed's power to keep crypto companies and other potentially risky businesses out of the banking system.
