Court Confirms Fed’s Discretion Over Access
A U.S. appeals court on Friday upheld a lower court ruling that the Federal Reserve is not required to grant Custodia Bank access to a master account, a key link to the central bank’s payment system. The decision, issued by the Tenth Circuit Court of Appeals, affirms that the Fed retains discretion over which institutions are allowed direct access to its accounts. “Accordingly, Custodia is not automatically entitled to a master account,” the judges wrote in the opinion. “We affirm the judgment of the district court in favor of Defendants on all claims.” The ruling confirms a 2023 decision by U.S. District Judge Scott Skavdahl in Wyoming, who found that the Federal Reserve Act does not compel the central bank to approve Custodia’s application. The case had become a closely watched test of whether fintech firms or state-chartered crypto banks can demand access to the Fed’s infrastructure.
The decision reinforces the Fed’s authority to limit direct access to its payment system, a setback for crypto-linked banks seeking parity with traditional institutions.
Custodia’s Years-Long Legal Effort
Custodia, founded by former Morgan Stanley managing director Caitlin Long, filed its master account application with the Federal Reserve Bank of Kansas City in 2020. In 2021, the Federal Reserve Board of Governors stepped in to take over the review process, effectively delaying a final decision. Custodia sued both the Kansas City Fed and the Board in 2022, accusing them of unlawfully withholding access. The bank’s request centered on gaining a master account—an essential tool that provides institutions direct access to the Fed’s payment network and enables real-time settlement of transactions. Without it, Custodia has been forced to rely on partner banks that already hold such accounts. After Judge Skavdahl’s 2023 ruling against Custodia, the company filed an appeal, arguing that the central bank’s refusal undermined competition and innovation in digital banking. The appeals court’s decision now closes off one of the few remaining legal paths for Custodia to gain direct access.
Wyoming’s Special-Purpose Bank Model
Custodia operates as a special purpose depository institution (SPDI) under Wyoming law, a framework that allows crypto-focused banks to hold digital and fiat assets in custody but bars them from lending out customer deposits. SPDIs must hold 100% of customer fiat deposits in reserve, unlike traditional banks that use fractional reserves. Custodia has argued that this model makes it safer than conventional banks and suitable for direct Fed access. Despite Wyoming’s efforts to create a state-level regulatory framework for digital banks, the Federal Reserve has so far resisted granting SPDI-chartered institutions master accounts, citing concerns about risk management and systemic exposure. Custodia’s case had been seen as a bellwether for whether crypto banks could integrate more directly into the U.S. financial system.
Wyoming’s SPDI model remains on uncertain ground. Without access to the Fed, such banks face structural limits on scaling custody and payments services.
Fed Signals Tight Control Over Access
The appeals ruling follows remarks earlier this month by Fed Governor Christopher Waller, who said the central bank was exploring a potential “skinny master account” framework for limited-access entities focused on payment innovation. Waller described the approach as a way to support experimentation without exposing the broader system to new risks. While Waller’s comments suggested some openness to fintech participation, Friday’s ruling indicates the courts are unwilling to compel the Fed to open its network to new entrants. For Custodia, which has spent more than three years pursuing approval, the outcome leaves few options beyond continued partnership with intermediary banks or legislative advocacy for clearer rules. The case also highlights the broader tension between state-level innovation, such as Wyoming’s crypto banking laws, and federal oversight. With the Tenth Circuit’s affirmation, the Fed’s authority to control direct access to the nation’s payment rails appears firmly intact.