The Blockchain Association has backed Custodia Bank’s Supreme Court petition challenging the Federal Reserve’s refusal to grant the Wyoming-chartered digital asset bank direct access to its payment system.
Summary
- The Blockchain Association has backed Custodia Bank’s Supreme Court challenge over the Fed’s denial of master account access.
- Custodia is asking the court to decide whether regional Fed banks can reject master accounts for eligible state chartered institutions.
- The industry group warned that the lower court rulings could give federal regulators unchecked power to restrict banking access for lawful industries.
- Custodia has pursued a Fed master account since 2020 after the Kansas City Fed denied its application in 2023.
- The Kansas City Fed is due to respond to Custodia’s Supreme Court petition by Sept. 11.
According to a Wednesday amicus filing, the Blockchain Association asked the U.S. Supreme Court to review whether regional Federal Reserve Banks can deny master accounts to state-chartered institutions that are legally eligible to request access.
The dispute centers on the authority regional Fed banks have when deciding which institutions can connect directly to central bank payment infrastructure. Custodia has argued that the Monetary Control Act requires the Fed to make its payment services available to eligible nonmember depository institutions, while lower courts have ruled that regional Reserve Banks retain discretion over whether to approve an application.
In its filing, the industry group warned that allowing that discretion to stand could affect state-chartered banks serving lawful industries that federal regulators may view unfavorably.
“No lawful industry should be excluded from essential banking services through regulatory pressure or unchecked administrative discretion,” the association said in an accompanying X thread.
The group added that the case concerns whether “lawful digital asset businesses can compete on equal footing” when seeking access to financial infrastructure.
Blockchain Association says Custodia Bank case could affect banking access
A Federal Reserve master account allows an eligible institution to connect directly to central bank payment services instead of routing transactions through a correspondent bank with its own Fed access.
For crypto-focused banks, direct access can reduce their dependence on third-party banking relationships for moving and settling U.S. dollars. Custodia has argued throughout the litigation that the issue is particularly important for state-chartered institutions that otherwise meet the legal requirements to seek Federal Reserve services.
The Blockchain Association took the argument further in its Supreme Court brief, focusing on what it sees as the consequences of allowing Reserve Banks to decide which eligible institutions receive accounts.
According to the group, the lower court decisions could provide “a blueprint for federal regulators to debank disfavored industries or companies in the future without interference from state regulators.”
The Supreme Court docket shows Custodia filed its petition for a writ of certiorari on July 10 after Justice Neil Gorsuch granted the bank additional time to bring the case before the court. The petition was docketed on July 14 as Custodia Bank, Inc. v. Federal Reserve Board of Governors, et al.
Custodia is asking the justices to review the Tenth Circuit’s interpretation of federal law rather than directly decide whether the bank currently qualifies for a master account. At issue is whether language in the Monetary Control Act stating that Federal Reserve services “shall be available” to eligible nonmember depository institutions leaves regional Reserve Banks with discretion to refuse an account.
The Federal Reserve Bank of Kansas City is due to respond to the petition by Sept. 11.
Custodia has fought for a Fed master account since 2020
Founded by Wall Street veteran Caitlin Long, Custodia received its Wyoming charter as a Special Purpose Depository Institution and applied to the Kansas City Fed for a master account in October 2020.
The application remained unresolved for more than a year. Custodia sued the Federal Reserve Board and the Kansas City Fed in June 2022, initially challenging what had become a 19-month delay in processing its request.
In January 2023, the Kansas City Fed denied the application. Federal regulators cited safety and soundness concerns connected to Custodia’s crypto-focused business model, including its concentration in digital asset activities.
The legal fight continued after the denial, with Custodia arguing that federal law did not give a regional Reserve Bank unlimited discretion to withhold a master account from an otherwise eligible institution.
A federal district court rejected the bank’s position in March 2024. Chief Judge Scott Skavdahl ruled that the Kansas City Fed had the legal authority to deny the application and rejected Custodia’s attempt to compel access to the central bank’s payment infrastructure.
Custodia appealed, but the U.S. Court of Appeals for the Tenth Circuit again sided with the Fed. The appellate ruling concluded that Reserve Banks retain authority to determine whether an eligible institution should receive a master account.
In March, the full appeals court then rejected Custodia’s request for an en banc rehearing by a 7-3 vote, leaving the earlier ruling intact. As previously covered by crypto.news, judges Timothy Tymkovich and Allison Eid dissented from the decision and argued that the majority had given Reserve Banks too much unchecked authority over state-chartered institutions.
Court records from the rehearing proceedings also described master account access as “indispensable” to a bank’s operations because Reserve Bank services include wire and electronic transfer systems used by depository institutions to move money.
The Supreme Court petition is Custodia’s latest attempt to overturn the legal interpretation that has blocked its challenge since the district court ruling.
Kraken approval changed the Fed master account debate
Custodia’s court fight has continued while another Wyoming-chartered crypto institution secured direct, although restricted, access to Federal Reserve payment rails.
In March, the Kansas City Fed granted Kraken Financial a limited-purpose master account, making the crypto exchange’s banking arm the first crypto-native institution to receive such access.
The account allows Kraken Financial to connect to core Federal Reserve payment infrastructure used for dollar settlement without receiving all of the benefits attached to a conventional master account.
As reported after the approval, the arrangement does not give Kraken access to interest on reserve balances or the Federal Reserve’s liquidity facilities. Banking groups, including the Independent Community Bankers of America and the Bank Policy Institute, questioned the decision and raised concerns about allowing a Wyoming SPDI without federal deposit insurance to directly access Fed infrastructure.
Representative Maxine Waters later asked Kansas City Fed President Jeff Schmid for details about the approval, including which Federal Reserve services Kraken Financial could use, the conditions attached to the account, and the legal basis for granting access. Waters also requested information on anti-money laundering and consumer protection reviews tied to the decision.
Federal policymakers have since considered a more formal route for restricted payment access.
In May, the Federal Reserve proposed a category of limited payment accounts that could allow eligible fintech and crypto-linked institutions to use clearing and settlement services without receiving the full privileges available to conventional banks.
Under the proposed restricted account framework, an applicant would still need to operate through an affiliate that qualifies as an eligible depository institution under the Federal Reserve Act.
The Fed also asked regional Reserve Banks to pause decisions involving Tier 3 master account applications while the policy is under consideration, with the rulemaking process expected to conclude by Dec. 31, 2026.
Kraken Financial’s limited account was approved before that process was completed. Its arrangement allows access to payment services while excluding interest on reserve balances and borrowing through the Fed’s discount window.
