A federal appeals court rejected crypto bank Custodia’s final bid to challenge the Fed’s authority to assign master accounts, but the decision comes at a time when the central bank is opening up other options for such accounts.
A Fed master account provides access to the central bank’s payment rails and full services, allowing an institution to cut out middlemen, making it coveted by new crypto banks like Wyoming-chartered Custodia Bank. The bank has battled with the Fed for years over the initial rejection of its master account application and later over whether the central bank should have the final say on whether to grant such access.
The U.S. Court of Appeals for the 10th Circuit revealed Friday that it declined to hear Custodia’s final appeal on that point by a 7-3 vote. But the latest in a string of legal defeats comes as the Fed system has slammed a door on master accounts for crypto firms.
First, a regional bank, the Federal Reserve Bank of Kansas City, recently granted crypto exchange Kraken a special new restricted account. While not a full master account, it has many of the same features, and Kraken is the first crypto company to get one for its bank branch.
At the same time, the Federal Reserve Board at the national level is working on a new policy to welcome crypto firms and others to so-called “skinny” master accounts that would likely be similar to Kansas City’s approach. That process is still in the early stages, so it’s unclear when crypto banks might start applying.
Custodia representatives did not immediately respond to a request for comment on Friday’s court ruling. A person familiar with its efforts said Friday that the bank is still pursuing access.
In a dissent issued by the court, one of the justices argued why the rehearing should have been granted. “To hold that the Reserve Banks have unfettered discretion over master accounts places us on the wrong side of the statute and, probably, the Constitution,” Judge Timothy Tymkovich wrote. “The case’s implications for the financial industry and its impact on the state-federal balance of banking regulation make it exceptionally important.”
The Kraken success prompted analysts to predict that other crypto names may soon join them on the list of master account firms, but some who have followed the year-long battle say it will be slow and dependent on which region of the reserve banking system they are in. The real rush of approvals may wait for the Fed to establish a nationwide approach to restricted accounts.
Read more: Crypto bank Custodia files petition for rehearing of all appellate judges
