Federal Appeals Court Denies Custodia Bank’s Master Account Bid While Kraken Secures Historic Approval

TLDR

• The US Court of Appeals for the Tenth Circuit denied Custodia Bank’s rehearing request in a 7-3 decision on Friday
• The Wyoming-based bank’s quest for Federal Reserve master account access began in October 2020
• On March 4, Kraken made history as the first cryptocurrency company to obtain a limited master account through the Federal Reserve Bank of Kansas City
• A dissenting judge described master account denial as tantamount to “a death sentence” for banking operations
• The Federal Reserve is developing a comprehensive “skinny” master account framework for cryptocurrency companies nationwide

Custodia Bank’s prolonged battle for Federal Reserve master account access has reached its conclusion. The US federal appeals court delivered a 7-3 decision on Friday, rejecting the cryptocurrency-focused bank’s petition for a rehearing.

The Wyoming-based financial institution submitted its initial master account application in October 2020. Master accounts enable financial entities to maintain reserves directly with the Federal Reserve and utilize its payment infrastructure without relying on intermediary banking relationships.

After the Federal Reserve denied its application, Custodia initiated legal proceedings. The bank’s legal argument centered on the Monetary Control Act, which it claimed guarantees state-chartered banks access to Federal Reserve services.

Successive court rulings have affirmed the Fed’s authority to exercise discretion when evaluating master account applications. The Tenth Circuit Court of Appeals’ Friday ruling definitively settles this legal dispute.

Three judges registered their opposition to the majority decision. In a forceful dissenting opinion, Judge Timothy Tymkovich characterized master accounts as “indispensable” for standard banking operations.

Custodia Bank has not issued an immediate statement regarding the decision. Sources close to the institution indicate it continues exploring alternative pathways to access.

Kraken Gets First Crypto Master Account

The unfavorable ruling arrives mere days following a significant breakthrough on the opposite front. The Federal Reserve Bank of Kansas City approved Kraken for a limited master account on March 4 — marking an unprecedented achievement for a cryptocurrency company.

Kraken’s approved account provides access to the Fedwire payments infrastructure. While it lacks the comprehensive service suite available to conventional banks, it encompasses numerous essential banking functions.

Fed Working on Wider Crypto Policy

The Federal Reserve’s national board is currently formulating guidelines for “skinny” master accounts. These restricted accounts would presumably mirror the limited access model granted to Kraken by the Kansas City Fed.

This policy development remains in preliminary phases. The timeline for when cryptocurrency banks can submit applications under the forthcoming framework remains undetermined.

Industry analysts anticipate additional crypto companies may pursue similar arrangements following Kraken’s precedent, though experts familiar with the regulatory landscape expect a cautious approval process. The speed of approvals may vary significantly depending on which regional Federal Reserve bank processes the application.

Once the Fed’s nationwide policy reaches completion, it could establish standardized procedures for cryptocurrency firms pursuing direct connections to the central bank’s payment network.

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