Custodia Bank has petitioned the full Tenth Circuit Court of Appeals for a rehearing on the Federal Reserve’s denial of its master account application. This crypto-focused institution argues that the decision undermines the Monetary Control Act and state banking authority, seeking direct access to central bank payment systems for efficient transactions.
Custodia Bank’s rehearing petition challenges the Federal Reserve’s denial of a master account, essential for direct payment processing.
The appeal highlights potential violations of the Monetary Control Act, which mandates access for eligible state-chartered banks.
This case raises constitutional concerns about federal oversight of state-approved charters, with implications for the broader crypto banking sector.
Custodia Bank appeals Federal Reserve master account denial to Tenth Circuit Court, arguing for crypto firms’ access rights. Learn how this could reshape banking for digital assets—stay informed on regulatory shifts today.
What is Custodia Bank’s Petition to the Tenth Circuit Court of Appeals?
Custodia Bank’s petition for a rehearing en banc seeks a full review by the Tenth Circuit Court of Appeals of a prior panel’s decision upholding the US Federal Reserve’s denial of its master account application. Founded by Bitcoin advocate Caitlin Long, the Wyoming-chartered crypto-focused bank argues that this denial misinterprets the Monetary Control Act, which it claims entitles eligible state-chartered institutions to direct access to Federal Reserve services. The petition, filed on Monday, emphasizes that such denials effectively override state regulatory approvals, posing serious questions about the balance of federal and state powers in banking.
The Monetary Control Act of 1980 was designed to ensure equitable access to Federal Reserve services for all depository institutions, regardless of whether they are members of the Federal Reserve System. Custodia Bank contends that the panel’s October ruling overlooked this statutory requirement, allowing the Fed to impose discretionary barriers that disproportionately affect innovative institutions like itself. By escalating to a full court review, Custodia aims to set a precedent that could benefit other crypto-native banks seeking independence from traditional correspondent banking relationships.
This development comes amid broader discussions in the financial sector about the integration of digital assets into the US banking framework. Custodia, which launched in 2020, has positioned itself as a pioneer in offering custody and banking services tailored to cryptocurrency users, emphasizing security and compliance with state regulations. The bank’s persistence in this legal battle underscores the challenges faced by crypto firms in gaining equal footing with conventional banks.
Why Does a Federal Reserve Master Account Matter for Crypto Banks?
A Federal Reserve master account provides financial institutions with direct access to the central bank’s balance sheet and payment systems, enabling efficient settlement of transactions in central bank money. For crypto banks like Custodia, this access eliminates the need for intermediary correspondent banks, which often introduce higher costs, operational risks, and settlement delays. According to Federal Reserve data, institutions without master accounts rely on third-party relationships that can increase transaction fees by up to 20-30% in some cases, based on industry analyses from banking regulators.
Custodia Bank has been pursuing this master account since its inception, viewing it as a cornerstone for scaling its services. The initial denial by the Kansas City Federal Reserve in January 2023 cited concerns over the bank’s crypto focus, despite Wyoming state regulators granting its charter. This rejection was compounded by the Fed’s denial of Custodia’s application to join the Federal Reserve System, forcing the bank to navigate payments through traditional partners.
Expert commentary from the sector reinforces the significance of this issue. Custodia Bank founder and CEO Caitlin Long has publicly described master accounts as the highest tier of banking infrastructure, stating in a July social media post that they represent a “Diamond” level of access, superior to trust companies or money transmitters. She noted that Custodia and Kraken stand out as the only two crypto entities operating as full banks, highlighting the rarity and value of such status.
Source: Custodia Bank founder and CEO Caitlin Long
The broader context of debanking in the crypto industry adds urgency to Custodia’s appeal. Reports from US regulators indicate that major banks have debanked crypto-related clients across several sectors, citing compliance risks under anti-money laundering rules. A study by the Government Accountability Office in 2023 documented over 200 instances of such actions since 2018, affecting payment processors and digital asset firms alike. Custodia’s case exemplifies these tensions, even as political support for crypto has grown under recent administrations.
In March, Long expressed frustration that despite expressed support for digital assets, federal actions have not addressed debanking systematically. This petition could prompt closer scrutiny of how the Federal Reserve exercises its authority, potentially influencing future applications from other fintech and crypto institutions. Legal experts monitoring the case, including those from the American Bankers Association, suggest that a favorable ruling might require the Fed to formalize clearer criteria for master account approvals, drawing from precedents like the 1980 Act’s intent.
From a operational standpoint, direct Fed access would allow Custodia to process client payments more securely, leveraging the central bank’s infrastructure for real-time gross settlement via systems like Fedwire. This is particularly vital for crypto transactions, which often involve high volumes and require instantaneous finality to mitigate volatility risks. Industry estimates from Chainalysis indicate that crypto payment volumes exceeded $10 trillion globally in 2024, underscoring the need for robust banking rails.
Frequently Asked Questions
What triggered Custodia Bank’s rehearing petition to the Tenth Circuit?
Custodia Bank filed the petition after a three-judge panel upheld the Federal Reserve’s denial in October, claiming the ruling misinterpreted the Monetary Control Act’s mandate for master account access. The bank argues this decision encroaches on state chartering powers and invites constitutional challenges to federal oversight.
How does the Federal Reserve master account denial impact crypto firms like Custodia?
Without a master account, crypto firms must use correspondent banks for Fed access, leading to higher costs and risks. This setup hinders efficient payment processing for digital assets, as explained by regulators, and limits scalability for institutions focused on blockchain-based services.
Key Takeaways
- Custodia’s en banc petition: Challenges the Fed’s discretionary power over master accounts, potentially reshaping access for state-chartered crypto banks.
- Monetary Control Act implications: Reinforces statutory rights for equal Fed services, addressing debanking trends in the crypto sector per regulatory reports.
- Future for crypto banking: A successful appeal could encourage more state innovations, urging firms to monitor legal outcomes and prepare compliant applications.
Conclusion
Custodia Bank’s bold petition to the Tenth Circuit Court of Appeals underscores the ongoing struggle for Federal Reserve master account access in the crypto banking space, highlighting tensions between federal discretion and state-authorized innovation. As the case progresses, it could clarify the Monetary Control Act‘s application to digital asset institutions, fostering a more inclusive financial ecosystem. Stakeholders in the crypto industry should watch closely, as favorable developments may pave the way for enhanced services and reduced reliance on traditional intermediaries—positioning the sector for sustained growth in the evolving regulatory landscape.