SKN | Custodia Bank Faces Another Setback as U.S. Appeals Court Rules Against Its Fed Master Account Bid

Key Points:

• The 10th Circuit Court of Appeals upheld the Federal Reserve’s discretion to deny Custodia Bank’s application for a master account.

• The ruling reinforces the Fed’s cautious stance toward crypto-integrated banks, citing systemic risk and regulatory oversight concerns.

• Custodia may seek a rehearing or Supreme Court appeal, as debate continues over how blockchain-based banks fit within the U.S. financial system.

Custodia Bank, the Wyoming-based crypto-friendly financial institution founded by Caitlin Long, has once again been denied access to the Federal Reserve’s master account system — a crucial component for banks seeking to directly connect to the nation’s central payments infrastructure.

In a decision issued Friday, the U.S. 10th Circuit Court of Appeals upheld a lower court ruling that the Federal Reserve has discretionary authority to reject applications for master accounts, dealing a fresh blow to Custodia’s two-year legal campaign to join the Fed’s payment network. The court’s ruling effectively confirms that crypto-focused banks remain on the periphery of the traditional financial system — at least for now.

Court Rules Fed Has Discretion in Master Account Access

The 10th Circuit’s opinion, authored by Judge David Ebel, concluded that existing statutes grant Federal Reserve Banks discretion to deny master account requests from otherwise eligible institutions. “We conclude the plain language of the relevant statutes grants Federal Reserve Banks discretion to reject master account access requests from eligible entities,” the decision stated, adding that this authority is essential for the Fed to “safeguard our nation’s financial system.”

The ruling affirms an earlier district court decision from 2024, which rejected Custodia’s claim that the Fed is legally obligated to provide access to any eligible depository institution. Custodia had argued that under federal law, the Fed must treat all chartered banks equally, regardless of their business models or affiliations with digital assets.

In its appeal, Custodia contended that the Federal Reserve Bank of Kansas City (FRBKC), which oversees its application, improperly coordinated with the Federal Reserve Board of Governors and the Biden administration to block its request. The appeals court found no evidence to support that claim, stating: “Custodia points to nothing in the record that would allow us to conclude that it was not FRBKC who made the final decision.”

Custodia’s Legal Strategy and Broader Implications

Founded in 2020, Custodia sought to operate as a Special Purpose Depository Institution (SPDI) — a Wyoming charter designed to bridge traditional finance and digital assets. The bank’s business model focuses on digital asset custody, tokenized payment rails, and blockchain settlement, aiming to provide compliant access to crypto infrastructure for institutional clients.

Securing a Federal Reserve master account would have allowed Custodia to hold deposits directly with the Fed and access payment systems such as Fedwire, eliminating reliance on intermediary banks. Without one, Custodia must rely on third-party partners, adding friction and regulatory complexity to its operations.

The latest decision underscores ongoing tensions between crypto innovation and central bank oversight. While Wyoming’s pro-crypto charter framework was designed to integrate blockchain finance into the banking sector, the Federal Reserve has consistently signaled caution, citing systemic risk, AML vulnerabilities, and liquidity concerns tied to digital assets.

Custodia responded to the ruling on X (formerly Twitter), acknowledging disappointment but noting a partial victory. “While we were hoping for a win at the [10th] Circuit today, we received the next best thing — a strong dissent,” the company said, adding that it is considering a petition for rehearing.

Regulatory Outlook: A “Skinny” Compromise Ahead?

While Custodia’s setback reinforces the Fed’s conservative stance, there may be room for compromise. In a recent speech, Federal Reserve Governor Chris Waller floated the idea of a “skinny master account” — a limited-access system that would let crypto-native or fintech firms connect to the Fed’s payment rails under strict risk controls.

Such a framework could give firms like Custodia partial access to settlement infrastructure without granting them full banking privileges. Still, it remains unclear whether the Fed will move forward with such an initiative, especially amid growing political scrutiny over crypto regulation following the 2024 market scandals and renewed focus on banking sector stability.

Analysts say the court’s decision may set an important precedent for how far crypto-oriented banks can go in integrating with traditional monetary systems. “The ruling effectively draws a line between chartered banks and central bank access,” said Karen Shaw, a financial regulation attorney at Georgetown Law. “It preserves the Fed’s autonomy but limits the potential for innovation under existing frameworks.”

A Long Road Ahead for Crypto Banking

Custodia’s fight illustrates the broader struggle for legitimacy among crypto-integrated financial institutions seeking equal footing with traditional banks. Despite setbacks, the case has already forced policymakers to confront how digital asset banking fits within a century-old regulatory system built for fiat institutions.

With the latest ruling, Custodia faces limited options: appeal for an en banc rehearing before the full 10th Circuit or escalate to the U.S. Supreme Court. Regardless of outcome, the case has become a litmus test for how the U.S. reconciles innovation with institutional conservatism — a debate that will likely shape the future of crypto banking for years to come.