Support for Custodia Bank’s Appeal
The Blockchain Association has expressed its support for Custodia Bank’s appeal to the Supreme Court, contesting the Federal Reserve’s decision to deny the Wyoming-based digital asset bank direct access to its payment system. In a legal brief submitted Wednesday, the Blockchain Association requested that the Supreme Court re-evaluate whether regional Federal Reserve Banks have the authority to deny master accounts to state-chartered banks, like Custodia, that comply with the legal requirements for access.
Core Conflict
The core of this conflict lies in the discretion exercised by the Federal Reserve’s regional banks in determining which institutions may connect to the central bank’s payment systems. Custodia contends that under the Monetary Control Act, the Fed is mandated to provide its payment services to qualified nonmember depository institutions. However, lower court rulings have permitted regional Fed banks to maintain discretion in approving such applications.
Potential Repercussions
In its filing, the Blockchain Association warned of potential repercussions if the current rulings remain intact, suggesting that it may restrict state-chartered banks that cater to legitimate industries, particularly those that federal regulators might deem contentious.
No lawful industry should be excluded from crucial banking services due to regulatory pressures or unchecked administrative biases.
Furthermore, the association emphasized the broader implications for competitive equality among lawful digital asset businesses in their quest for access to essential financial infrastructure.
Importance of Master Accounts
A master account with the Federal Reserve allows eligible banks to interact directly with central bank payment services, avoiding the need to route transactions through other banks that have their Fed accounts. For banks focusing on cryptocurrencies, this direct access is vital as it diminishes their reliance on intermediary banking relationships for transactions in U.S. dollars. Throughout the legal process, Custodia has maintained the importance of this matter particularly for state-chartered banks that meet the legal criteria for Federal Reserve services.
Legal Proceedings
The Blockchain Association’s Supreme Court brief elaborated on the potential dangers of granting Reserve Banks unchecked authority over which institutions receive master accounts. The group argued that the lower court’s decisions might set a precedent enabling federal regulators to deny services to disfavored sectors without oversight from state authorities.
On July 10, Custodia submitted its petition to the Supreme Court following an extension granted by Justice Neil Gorsuch, with the petition officially recorded on July 14 under the title Custodia Bank, Inc. v. Federal Reserve Board of Governors, et al. Rather than seeking a ruling on its specific eligibility for a master account, Custodia’s request calls for the justices to review the Tenth Circuit’s understanding of federal law regarding the language in the Monetary Control Act that asserts Federal Reserve services “shall be available” to eligible nonmember institutions while questioning the degree of discretion left to regional banks.
Federal Reserve Response
The response from the Federal Reserve Bank of Kansas City is anticipated by September 11. Founded by industry veteran Caitlin Long, Custodia was granted a charter as a Special Purpose Depository Institution in Wyoming and applied for a master account from the Kansas City Fed in October of 2020. After a prolonged 19-month wait, Custodia found itself compelled to litigate against the Federal Reserve Board and the Kansas City Fed, challenging the stalled review of its application.
In January 2023, the Kansas City Fed rejected Custodia’s application citing concerns over its focus on cryptocurrency-related activities. The subsequent legal battle saw Custodia argue against the notion that the Federal Reserve should have unlimited discretion in denying master accounts to eligible banks. However, in March 2024, a federal district court sided with the Kansas City Fed, affirming the regional bank’s authority to deny access, a conclusion later upheld by the Tenth Circuit Court of Appeals despite Custodia’s appeal.
Impact on Other Institutions
The full appellate court declined Custodia’s request for an en banc hearing by a vote of 7-3, thereby solidifying the earlier ruling. Dissenting judges suggested that allowing Reserve Banks so much leeway would undermine the oversight roles of state regulators. Court records indicated that access to a master account is essential for the operation of any bank, as it facilitates the critical services of wire and electronic money transfers.
Custodia’s ongoing legal efforts have unfolded alongside another Wyoming-chartered cryptocurrency institution, Kraken Financial, which managed to secure a limited master account from the Kansas City Fed in March. This account allows Kraken to engage with important Federal Reserve payment systems, although it lacks some of the benefits of a traditional master account, such as access to interest on reserves or liquidity facilities from the Fed. This approval has raised eyebrows among banking groups who have questioned the wisdom of allowing a state-chartered institution without federal deposit insurance access to Fed-owned payment infrastructure.
Regulatory Developments
Subsequently, Representative Maxine Waters sought clarification from the Kansas City Fed regarding the nature of the services available to Kraken Financial under its limited account, the rationale for the decision, and compliance measures related to anti-money laundering and consumer protection. The Federal Reserve has since explored formalizing a new category of limited payment accounts for eligible fintech and crypto-related institutions, capable of facilitating basic banking services without granting full banking privileges. A proposed framework would require these applicants to maintain ties with an affiliate institution recognized as an eligible depository under the Federal Reserve Act. Currently, the Fed has paused master account decisions in this area as this regulatory process continues, with the expected conclusion date targeted for December 31, 2026. Kraken’s limited master account was approved prior to the finalization of this new policy, allowing it access to essential payment services while barring interest on reserves and borrowing options through the discount window.
