Tenth Circuit Ruling Favors Fed: Custodia's Master Account Denied

Bitcoin Magazine

Tenth Circuit Ruling Favors Fed: Custodia's Master Account Denied

In a 2-1 decision released today, the Tenth Circuit has upheld the denial of a master account from the Federal Reserve to Custodia Bank, a Special Purpose Depository Institution (SPDI) based in Wyoming that has emerged as a focal point for crypto-centric banking. The court's ruling affirmed the district court's decision entirely, granting the Reserve Banks considerable, and potentially unchecked, authority regarding access to these accounts.

Master accounts serve as the essential gateway to the fiat financial system. They enable institutions to clear and settle transactions directly with the Federal Reserve; without one, a financial entity operates merely as a safe deposit box, reliant on unpredictable third-party systems. This pivotal choke point, which has previously been manipulated by regulators, bestows significant policy implications on any discretion surrounding access.

Wyoming established SPDIs to integrate traditional dollar banking with dedicated digital asset services. Custodia, which is prohibited from issuing loans and must maintain dollar deposits fully backed by high-quality liquid assets, submitted its application for a master account in October 2020. Initial feedback from the Kansas City Federal Reserve was optimistic, indicating “no showstoppers.” However, following the Board's finalization of access guidelines in 2022, the Kansas City Fed classified Custodia as a Tier 3 applicant, subjecting it to the most stringent review processes. Consequently, the account was officially denied in January 2023, with the Board, after consulting in advance, indicating no issues with the Kansas City Fed's decision to deny the application.

Judge Ebel, writing for the majority, dismissed Custodia's statutory and administrative arguments, effectively granting the Federal Reserve broad, and perhaps limitless, discretion concerning these matters. The court interpreted the Federal Reserve Act’s § 342 (“may receive deposits”) in conjunction with the Monetary Control Act’s § 248a, concluding that the authority to determine access remains with the Reserve Banks. The language in § 248a(c)(2) stating that accounts “shall be available” pertains to the pricing and parity of services provided by the Board, rather than obligating the Banks to grant accounts to all qualifying institutions. The court also characterized the 2022 “Toomey Amendment” (§ 248c) as aimed at enhancing transparency, rather than as a directive to approve all applications.

From an Administrative Procedure Act (APA) perspective, the panel ruled that the Board’s “no-concerns” email did not constitute final agency action, asserting that the ultimate decision rested with the Kansas City Fed under its guidelines, thus lacking independent legal weight. This finding also weakened arguments directed at the Board itself. Lastly, Judge Ebel dismissed Custodia's constitutional claim regarding the presidential appointment of inferior officers on a somewhat tenuous basis, arguing that the point was not adequately preserved.

In dissent, Judge Tymkovich interpreted § 248a(c)(2)’s “shall be available” as a substantive guarantee of access rather than mere pricing terminology. He argued that when Congress opened Federal Reserve services to “nonmember depository institutions,” it effectively imposed a duty to provide access to master accounts, which could be enforced via traditional means such as mandamus, rather than leaving it to the discretion of the Reserve Banks. This interpretation suggests a more stringent oversight of the Federal Reserve's decision-making process regarding access to financial services.

This ruling marks a significant moment in the ongoing debate surrounding the intersection of cryptocurrency and traditional banking systems, and it raises questions about the future of crypto sovereignty as institutions like Custodia seek to navigate a regulatory landscape that remains unpredictable and complex.

As the tension between innovation in the crypto space and regulatory frameworks continues, the implications of this decision could resonate across the financial ecosystem, influencing how emerging financial technologies are integrated into existing systems.