The U.S. Appeals Court recently ruled, affirming the discretion of regional Federal Reserve Banks in reviewing master account applications. This means that the central bank is not required to approve all account applications submitted by state-chartered institutions.
Court Denies Rehearing Request, Upholds Original Ruling
The appeals court rejected a request for a full en banc rehearing of the dispute. Therefore, the ruling from the same court last October remains the final decision. The ruling stated that Federal Reserve Banks have the authority to determine which institutions can obtain master accounts.
Custodia Bank had argued that, under federal law, state-chartered banks are entitled to services from the Federal Reserve System, citing the Bank Holding Company Act as the basis. However, the court found that the law does not mandate automatic approval of account applications.
Instead, the court's ruling confirmed that Reserve Banks can assess each application based on safety and operational considerations. Thus, if regulators perceive risks, they can deny access to account privileges.
Custodia's Crypto Banking Model Faces Regulatory Challenges
Custodia is a Wyoming-based bank focused on digital asset services, aiming to provide custody and payment tools for companies in the blockchain space. Direct access to a master account would enable the bank to settle transactions through the Federal Reserve's payment system.
However, regulators have expressed concerns about the risks associated with cryptocurrency-related activities, believing these activities could raise questions about financial stability and bank safety. As a result, the Federal Reserve denied Custodia's application in 2023.
Despite Custodia's legal action, multiple courts throughout the legal process have not adopted its interpretation of the law.
Kraken's Approval Case Signals Limited Access Pathways
Shortly after this ruling, another development emerged in the cryptocurrency space. Kraken recently received approval for a master account from the Kansas City Federal Reserve Bank, allowing it to connect to the Fedwire payment system.
However, the account functions granted to Kraken are limited compared to traditional bank accounts and do not provide all the Federal Reserve services available to conventional banks.
Nonetheless, this decision has sparked discussions about offering “streamlined” master accounts for crypto institutions, which may allow limited access to payment channels without granting full banking privileges.
Dissenting Voices Focus on Fed's Authority
Three judges supported Custodia's position and issued a dissenting opinion. The dissent argued that the majority's interpretation grants the Federal Reserve too much power.
The dissent emphasized that master accounts are crucial for regular banking operations; without a master account, banks must rely on intermediaries to process payments and settlements.
Additionally, the dissent pointed out that Federal Reserve officials initially suggested that there were no significant obstacles to Custodia's application, but regulators ultimately denied the request after a lengthy review.