US Appeals Court Upholds Fed’s Rejection of Custodia Bank Master Account - Crypto Banking Setback

Federal regulators tighten grip on crypto banking access

The financial establishment just slammed another door shut. A US appeals court sided with the Federal Reserve, backing its decision to deny Custodia Bank access to the master account system that serves as the lifeblood for traditional financial institutions.

No backdoor entry for crypto natives

This ruling cuts off a critical pathway for digital asset firms seeking legitimacy within the conventional banking framework. Without master account access, crypto banks remain stuck in regulatory limbo—forced to rely on intermediary relationships that add layers of complexity and cost.

The old guard protects its turf

Wall Street's gatekeepers maintain their stranglehold on financial infrastructure, proving once again that innovation moves faster than regulation. Traditional banks get to keep their exclusive club membership while crypto institutions watch from the outside.

Another reminder that in finance, the house always wins—even when the game changes.

Judge Says Fed Has Right to Deny Custodia to ‘Safeguard Financial System’

Writing for the majority, Judge David Ebel, appointed by former President Ronald Reagan, said the law gives the Fed authority to “reject master account access requests from eligible entities” in order to protect financial stability.

“We reject Custodia’s attempt to impair the Fed’s ability to safeguard our nation’s financial system through the exercise of discretion,” Ebel wrote.

Custodia, which operates under Wyoming’s Special Purpose Depository Institution (SPDI) charter, argued that it is being unfairly excluded from the national banking network despite meeting the necessary criteria.

The Federal Reserve Bank of Kansas City, however, determined that Custodia’s business model, centered on custody and settlement of crypto assets, posed “undue risk” to the broader financial system.

In a dissenting opinion, Judge Timothy Tymkovich, appointed by President George W. Bush, argued that the Fed’s own statutes mandate it to provide payment services to all eligible non-member banks, including Custodia.

“This case comes clothed in 21st-century terms: cryptocurrency, digital assets, instant wire transfers, and master accounts,” he wrote. “But there is nothing new about this issue.”

Custodia called the decision “disappointing” but pointed to Tymkovich’s dissent as validation of its position.

“We were hoping for a win at the Tenth Circuit today, but we received the next best thing — a strong dissent,” the bank said, adding that it may seek a rehearing based on a conflicting ruling in a related case.

Statement of @custodiabank: pic.twitter.com/6U0FPzaKCm

The decision leaves Custodia, and other crypto-oriented financial institutions, still locked out of direct access to the US payments infrastructure. So far, no crypto-focused bank has received a master account.

Fed Governor Floats ‘Skinny’ Master Accounts for Crypto-Focused Banks

Notably, the regulatory landscape could soon shift.

As reported, the Federal Reserve plans to open its payment network to stablecoin issuers and fintech firms without requiring them to partner with traditional banks, a significant policy reversal after years of hesitation toward crypto.

Fed Governor Christopher Waller announced last week that the proposal during the central bank’s Payments Innovation Conference on October 21, introducing new “payment accounts” or “skinny master accounts” for legally eligible institutions.

These limited-access accounts WOULD connect firms directly to the Fed’s payment rails while maintaining strict safeguards to reduce systemic risk.

Under the proposal, participating firms would face balance caps, no interest on deposits, and no overdraft privileges, ensuring minimal exposure for the Fed’s balance sheet.

Waller said the new structure aims to keep the central bank competitive with rapid innovation in payments.