The U.S. appeals court has denied a rehearing for Custodia Bank’s legal challenge against the Federal Reserve over access to the U.S. banking system. The decision maintains a previous court ruling that allows Reserve Banks to make their own decision regarding access to master accounts.
The Tenth Circuit Court of Appeals ruled on March 13. The court’s decision was 7-3 against a rehearing. The decision maintains a previous ruling made in October.
The court’s decision involves Federal Reserve master accounts. The accounts allow a bank to access the Federal Reserve payment system. They enable institutions to clear and settle transactions through the central bank.
Source: X
Custodia Bank’s Push for Fed Master Account
Banks without a master account must rely on another bank, which handles the transactions on behalf of the bank without a master account. Direct access removes the need for such intermediaries.
Custodia Bank has been applying for a master account since 2020. This Wyoming-chartered bank specializes in providing banking services related to digital assets. The bank argued that having direct access would help provide payment services to companies dealing in crypto assets.
The Federal Reserve denied the master account application made by the bank. This decision came in 2023. The regulators argued that the banking model of the bank posed a risk to financial stability.
The bank later decided to sue the central bank. The bank said that the law required the central bank to provide access to banks that are properly chartered. It claimed the Federal Reserve must grant master accounts to eligible institutions.
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Federal courts have consistently ruled in favor of the central bank. The courts have ruled that Reserve Banks have the discretion to make a judgment. The ruling by the appeals court in the past was consistent in this regard.
Source: Custodia Bank
Court Upholds October Ruling in Custodia Bank Case
The latest decision by the court means that the decision in October will still be followed. The Federal Reserve retains its authority to accept or deny the request for a master account.
The decision by the court was not unanimous. There were dissenting opinions by three members of the court. The dissenting opinions were based on the authority granted to the Reserve Banks.
Judges Timothy Tymkovich and Allison Eid dissented on the decision. They argued that the decision allows the Federal Reserve banks to have significant power. The dissent argued that the decision lacks adequate restraints on such power.
The judges also cautioned on the impact on chartered banks. According to the dissenters, broad discretion could prevent access to key financial infrastructure. The Federal Reserve System is a key part of the United States banking system.
For Custodia Bank, the ruling has maintained the current barrier. The bank still does not have a master account with the Federal Reserve. The bank’s legal attempt to gain direct access to the payment system has been unsuccessful.
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