Crypto-focused Custodia Bank’s long legal battle for direct access to the US Federal Reserve (Fed) has ended with the appeals court rejecting its final appeal. While the decision put an end to the bank’s five-year effort, it once again brought to the agenda the Fed’s broad discretion over who can use its payment infrastructure.
Fed’s Discretionary Power Strengthened by Judicial Decision
The US Court of Appeals decided not to reconsider Custodia Bank’s request for a Federal Reserve master account. This account allows financial institutions to hold reserves directly at the Central Bank and connect directly to the Fed’s payment system. Custodia made his application in October 2020 and took the matter to court after his application was rejected.
Referring to the Monetary Control Act, which regulates monetary policies in the USA, the bank argued that it was mandatory to provide services to state-licensed banks. The institution stated that it operates with a focus on crypto assets and that direct access to the payment system is critical for the operation. However, the courts emphasized that the Federal Reserve still has the authority to decide on master account applications.
Custodia Bank argued that direct access to the Central Bank’s payment system is a fundamental requirement for maintaining activity in the digital asset sector.
Among the arguments of the Custodia front, it was also highlighted that it offered a risk-free structure in the sector with a full-reserve, non-credit model. With the appeals court’s decision, the Fed’s discretion over such applications was strengthened.
Crypto and Fintech Companies Are Trying to Integrate into Banking in the USA
Custodia’s court process coincided with a period when crypto asset companies and fintech organizations’ demands for access to the banking infrastructure in the USA increased. Recently, Kraken managed to open a restricted-access account at the Federal Reserve’s Kansas City branch. Although Kraken’s master account did not provide all the full-blown bank-level functionality, it stood out as a breakthrough in terms of connectivity to the Fedwire payment system.
The developments have led to opinions that financial regulators in the USA may consider more limited or controlled access models for crypto companies in the future.
Timothy Tymkovich, a member of the Court of Appeals, argued that master account access is indispensable for banks and that a rejection decision could mean “a death sentence.” Tymkovich also noted that the Fed’s initial assessment did not show any obstacles during Custodia’s application.
Crypto companies’ quest for access to banking in the US is not limited to these. UK-based fintech company Revolut applied to the OCC and FDIC for the second time to obtain a national bank license in the country. If the application is accepted, the company will be able to operate within a single federal framework in all states of the USA.
Recently, companies such as Nubank, Crypto.com, Circle, Ripple, BitGo, Fidelity Digital Assets and Paxos have also applied to the OCC for a bank license. These applications show that efforts to directly integrate fintech and the digital asset industry into the US banking infrastructure continue to increase.
