Custodia Bank Loses Federal Reserve Master Account Appeal as Kraken Gains Access

TLDR

• A US federal appeals court rejected Custodia Bank’s final appeal over Federal Reserve master accounts in a 7-3 vote
• Custodia has been fighting for a master account since October 2020
• Kraken became the first crypto firm to receive a limited master account from the Federal Reserve Bank of Kansas City on March 4
• One dissenting judge called being denied a master account “akin to a death sentence” for a bank
• The Federal Reserve is now working on a nationwide “skinny” master account policy for crypto firms

Custodia Bank has lost its final legal challenge against the Federal Reserve over master accounts. A US federal appeals court voted 7-3 on Friday to deny the crypto bank’s request for a rehearing.

The Wyoming-chartered bank first applied for a master account in October 2020. A master account lets financial institutions hold reserves directly at the Federal Reserve and access its payment system without going through a middleman bank.

The Fed rejected Custodia’s application. Custodia then took the Fed to court, arguing the Monetary Control Act gives state-chartered banks the right to Fed services.

Multiple courts have now ruled the Fed has discretion over whether to grant master accounts. Friday’s decision from the US Court of Appeals for the Tenth Circuit closes out that argument for good.

Three judges disagreed with the outcome. Judge Timothy Tymkovich wrote a strong dissenting opinion, saying a master account is “indispensable” for a bank’s daily operations.

Custodia did not immediately respond to requests for comment. A person familiar with the bank’s work said it is still pursuing access through other means.

Kraken Gets First Crypto Master Account

The court loss comes just days after a major development on the other side of the issue. On March 4, the Federal Reserve Bank of Kansas City granted Kraken a limited master account — the first ever given to a crypto firm.

Kraken’s account connects it to the Fedwire payments system. It does not include the full range of services a traditional bank would receive, but it carries many of the same core features.

Fed Working on Wider Crypto Policy

The national Federal Reserve board is now developing a policy for so-called “skinny” master accounts. These would likely follow the same model as Kraken’s limited account in Kansas City.

That process is still in early stages. It is not yet clear when crypto banks can begin applying under the new policy.

Analysts have said other crypto firms may follow Kraken’s path, but observers who have watched the space closely say approvals will be slow. The pace may depend on which regional Fed bank a firm applies to.

The Fed’s nationwide policy, once finalized, could set a more consistent process for crypto firms seeking direct access to the central bank’s payment system.

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