• The Tenth Circuit affirms the Fed’s authority to control access to master accounts.
• The court warns against automatic approvals, citing risk factors tied to digital asset-focused institutions.
• Judge Tymkovich dissents, suggesting that more oversight, rather than outright denial, could foster innovation.

The U.S. Tenth Circuit Court of Appeals has ruled against Custodia Bank’s attempt to secure direct access to the Federal Reserve’s payment system. By a decision of 2 to 1, a post on X by Eleanor Terret confirms that the court reiterated the Fed’s power to manage the access to master accounts, which are necessary for direct involvement in the central bank’s network. 

The decision is a heavy setback for Custodia, a digital asset bank located in Wyoming, and highlights the Federal Reserve’s power to choose the institutions that are likely to pose threats to the financial system and, hence, to keep them under its close monitoring.

Court Decision Reinforces Fed’s Control Over Master Accounts

The judges of the Tenth Circuit Court ruled in favor of the Federal Reserve, underlining its authority to dictate who gets master accounts among the institutions. The court cautioned that the granting of requests without consideration might deprive the payment system of the very stability safeguards that it is relying on. 

The court was especially keen on the oversight of institutions connected with unpredictable business models, for example, cryptocurrency-related companies. The court’s opinion aligned with the Fed’s stance that Custodia’s focus on digital assets introduced significant risk factors, including market volatility and compliance challenges.

The ruling follows Custodia’s failed 2020 application for a master account with the Kansas City Federal Reserve branch. The Fed had previously denied the application, citing concerns over digital asset exposure and potential instability.

Custodia’s Challenge and the Path to the Appeals Court

Custodia Bank first sought direct access to the Federal Reserve’s payment system in 2020. The Kansas City Fed rejected the application, which led to Custodia filing a lawsuit against the Fed. A district court in Wyoming dismissed the case, and the appeals court has now upheld that decision, affirming the Fed’s ability to block access for institutions that pose perceived systemic risks. 

The ruling makes clear that the central bank holds the authority to evaluate and restrict access at its discretion. Judge Timothy Tymkovich dissented from the majority opinion. He argued that the Federal Reserve could mitigate potential risks through more detailed oversight, rather than outright rejection of an institution’s application.

Judge Tymkovich expressed concern that denying access to institutions like Custodia could hinder innovation in the financial sector. He also pointed out that traditional banks with master accounts have also faced risks, but are still granted access to the Fed’s system.

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