Appeals Court Affirms Fed’s Discretion, Rejects Custodia’s Bid for Master Account

A three-judge panel of the U.S. Court of Appeals for the Tenth Circuit ruled in favour of the Federal Reserve’s discretion to deny master-account access to entities that meet technical eligibility but are not assured entitlement.

In the opinion authored by Judge David Ebel, the court stated:

“We conclude the plain language of the relevant statutes grants Federal Reserve Banks discretion to reject master account access requests from eligible entities …”

This ruling comes after an earlier decision by a federal district court in Wyoming, which similarly held that the Fed was not obligated to grant master-account status to every eligible applicant.

Background

Custodia Bank, a Wyoming-chartered special-purpose depository institution (SPDI) focused on digital assets and crypto-custody services, applied in October 2020 for a master account at the Federal Reserve Bank of Kansas City. The stated purpose was to obtain direct access to the Fed’s payment and settlement infrastructure rather than relying on an intermediary bank.

The Fed denied the application in January 2023, citing concerns over the bank’s business model, involvement in volatile digital-asset markets, and risk-management controls.

Custodia sued in June 2022, alleging the Fed’s delay and eventual rejection were unlawful; the district court ruled against Custodia, and the appeals court has now affirmed that ruling.

Implications

• The ruling reinforces that master account access is not an automatic right for eligible institutions—even those chartered under state law with technical eligibility.

• The Fed’s discretion remains broad, especially regarding new or non-traditional banking models tied to digital assets.

• Crypto-centric banks may face structural barriers to obtaining direct access to core central banking infrastructure unless regulation or statute changes.

• On the other hand, consumer-banking trade groups such as the Independent Community Bankers of America (ICBA) hailed the decision as protecting the banking system’s stability.

The Dissent

Judge Timothy Tymkovich dissented, arguing the majority endorsed “unreviewable executive authority” in unappointed officials and questioned the constitutional basis of the Fed’s broad discretion.

Next Steps for Custodia

Custodia said it is actively considering a petition for rehearing before the appeals court. Meanwhile the Fed has suggested the possibility of a “skinny” master account model—a limited access version of a master account for specialized institutions—to strike a balance between innovation and systemic risk.