A U.S. appeals court has decisively upheld the Federal Reserve’s broad discretion in controlling access to the nation’s core financial system, effectively blocking digital asset banks like Custodia from direct participation and solidifying traditional gatekeeping.
The ruling by the Tenth Circuit Court of Appeals in Denver confirmed an earlier decision by a Wyoming district court. Judges stated, “Custodia does not have an automatic right to a master account,” affirming the lower court’s judgment.
Custodia, a digital asset bank led by Wall Street veteran Caitlin Long, has sought direct access to the Federal Reserve’s payment system since 2020. This access is crucial for financial institutions to connect directly to the U.S. money supply without intermediaries.
Entities lacking master accounts must operate through other banks that hold them, which limits their independence and operational capacity. The Federal Reserve’s stance maintains its full discretionary power over which institutions receive such accounts.
Wyoming District Court Judge Scott Skavdahl had previously ruled that the Federal Reserve is not obligated to grant master account access. This decision underscores the central bank’s authority to decide who can directly participate in its payment systems.
Custodia, originally known as Avanti Bank, applied to the Federal Reserve Bank of Kansas City. Its aim was to offer fully reserved financial services, distinct from traditional fractional-reserve banking.
The bank filed a lawsuit in 2022 against the Federal Reserve’s Board of Governors and the Kansas City Fed, alleging undue delays in processing its application. Custodia viewed the Federal Reserve Board’s 2021 intervention in the decision-making process as an attempt to impede digital asset banks from entering the U.S. financial system.
As a Special Purpose Depository Institution (SPDI) under Wyoming law, Custodia is required to hold 100% of its deposits in reserve, preventing it from lending money. The appeals court’s decision reiterates that the Federal Reserve’s discretion applies even if an entity complies with state-level banking laws.
This ruling comes despite recent comments from Federal Reserve Governor Christopher Waller, who acknowledged the financial system is entering a “new era” with innovations in payments and crypto assets. Waller had even suggested exploring a “skinny master account” model for innovative institutions that do not pose systemic risk.
For now, the court’s decision reinforces that direct access to the U.S. financial system’s core remains a privilege determined by the Federal Reserve’s sole discretion.