Custodia Bank Fights Back: Challenges Federal Reserve’s Authority to Deny Access to Core Payment System
Another day, another crypto firm tangling with the old guard. Custodia Bank just threw a legal haymaker at the Federal Reserve, questioning its very right to lock digital asset banks out of the plumbing that makes traditional finance hum.
The Heart of the Financial System
At stake is access to the Fed's master account and payment rails—the core infrastructure that lets banks move money instantly and settle transactions. Without it, you're stuck in the slow lane, watching the legacy system speed by. Custodia's argument is blunt: the Fed's gatekeeping isn't just unfair; it might be overstepping its legal bounds.
A Battle for Legitimacy
This isn't just about one bank. It's a direct challenge to the regulatory moat protecting traditional finance. By denying access, the Fed effectively sidelines crypto-native institutions, forcing them to rely on intermediaries—a costly, inefficient workaround that smells a lot like regulatory capture. It’s the financial equivalent of being told you can build a car, but you’re not allowed on the highways.
The Stakes for Digital Finance
A win for Custodia could rip open the gates. It would signal that compliant crypto banks deserve a seat at the same table, with direct access to the same real-time settlement and liquidity that Wall Street enjoys. It cuts out the middleman, reduces risk, and could finally bridge the gap between digital and traditional assets. The alternative? More of the same friction that lets traditional banks charge a premium for 'innovation' they're actively stifling.
The Fed now has to defend its 'just trust us' denial in court. In an era where transparency is demanded, opaque rejections don't cut it. This case could force a long-overdue conversation about who gets to play in the financial sandbox and why. After all, nothing disrupts a cozy monopoly like a little competition—even if the incumbents have to be dragged into it kicking and screaming.
Custodia master account application rejected by the Fed
In October 2020, Custodia made a bid for a master account, a gateway that allows banks to settle payments directly with the Federal Reserve. Without one, institutions must use intermediaries since they cannot operate independently within the US financial system.
The financial institution, which also applied for a Wyoming charter during the same year subject to federal supervision, propounded that the appellate panel’s ruling improperly overstated the Fed’s authority and nerfed the decisions of state banking regulators.
According to its petition, the bank said the ruling granted the central bank unchecked power that raises “serious constitutional questions,” particularly because it places decisive control in the hands of Fed officials who are not appointed as officers of the United States under Article II of the Constitution.
Custodia said the panel’s interpretation allows the US central bank to override state-issued banking charters, even when institutions meet eligibility requirements set out in federal law. Its original application for a master account was denied by the Federal Reserve in 2023.
After losing in district court, the bank appealed to the Tenth Circuit, arguing that the Fed exceeded its authority by refusing access to an otherwise eligible institution.
The three-judge panel rejected those arguments in October, concluding that the Federal Reserve retains discretion to deny master accounts, even to state-chartered and federally supervised banks.
In its rehearing request, the bank argued that the panel misread the Monetary Control Act, a statute governing access to Federal Reserve services. The law states that central bank services “shall be available” to eligible depository institutions.
Language Custodia says the panel improperly converted into optional authority.
“The panel’s holding invaded the States’ Core regulatory prerogatives and put the Fed in constitutional quicksand. Courts usually try to avoid such outcomes, not create them,” the appeal read, quoting language Custodia has been talking about since the end of October.
Crypto bank: Statutory mandate gives the US Fed too much power
Custodia’s attorneys talked about a federal law cited by two of the three judges dubbed the “statutory mandate”, which they reckoned was discretionary. The crypto bank believes this allows regional Federal Reserve banks to nullify state regulatory decisions through an “unreviewable discretion.”
The petition leaned on a dissent issued alongside the October ruling by Judge Timothy Tymkovich, who was the sole opponent of the decision. In that dissent, Tymkovich bashed the rest for endorsing a reading of federal law that shields the Federal Reserve from meaningful judicial review.
“I doubt our Constitution allows that,” Tymkovich wrote. “By claiming unreviewable discretion over access to the nation’s financial system, the Fed has gone too far.”
The “against” judge also discussed a statutory language stating that Federal Reserve services “shall” be available to eligible non-member banks. Custodia cited this reasoning to support its claim that Congress intended access to be mandatory, not optional.
The legal fight unfolds as several crypto-focused firms seek entry to the Federal Reserve’s payment rails. Those applicants include Crypto.com, Ripple, Circle, Coinbase, Paxos, and Bridge, a stablecoin infrastructure provider owned by Stripe.
Federal Reserve Governor Christopher Waller said companies holding such charters, along with Wyoming special-purpose depository institutions like Custodia and Kraken, could be eligible for proposed “skinny” master accounts with limited access to the Fed’s payment services.
“They can request, but it doesn’t mean you get one, let’s be clear. It just says you’re able to request,” Waller explained, adding that decisions are at the Fed’s discretion.
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