Custodia Bank Appeals Fed’s Master Account Denial in Court

Custodia Bank, founded by prominent Bitcoin advocate Caitlin Long, has taken a significant procedural step in its protracted legal struggle. On Monday, the company filed a petition formally known as a “rehearing en banc” with the United States Court of Appeals for the Tenth Circuit. This petition asks all active judges of the court to reconsider a three-judge panel’s October decision, which upheld the Federal Reserve Bank of Kansas City’s denial of a master account to Custodia. The bank’s argument hinges on a claim that the appellate panel misread the governing statute, setting the stage for a broader judicial review of the Federal Reserve’s discretionary power.

The core of Custodia’s legal challenge is the interpretation of the Monetary Control Act of 1980. The bank asserts that this federal law entitles any eligible depository institution to a master account, a position it argues the prior panel failed to uphold. By denying this access, Custodia contends the Federal Reserve is not only acting outside its statutory mandate but is also undermining the authority of state banking charters. Wyoming, where Custodia is chartered as a Special Purpose Depository Institution (SPDI), has established a regulatory framework intended to accommodate innovative financial services, including those related to digital assets like Bitcoin (BTC). This case thus tests the boundaries between state-level financial innovation and federal oversight.

A master account at the Federal Reserve is far more than a procedural formality; it is a foundational element of the U.S. banking system. It allows a bank to settle transactions directly with the Fed, facilitating the movement of money across the economy. For traditional banks, this is standard. For Custodia Bank, which aims to provide seamless services for cryptocurrency clients, direct access is operationally critical. Without a master account, Custodia must rely on intermediary correspondent banks to process payments, adding layers of cost, complexity, and potential delay to its crypto-focused operations.

This operational hurdle is central to the dispute. The Federal Reserve has expressed concerns about granting master accounts to institutions involved with digital assets, citing potential risks to financial stability, money laundering, and consumer protection. Custodia’s petition challenges the Fed’s authority to impose such qualitative judgments beyond the eligibility criteria set by Congress. The outcome of this case will have significant implications not just for Custodia but for the broader landscape of state-chartered banks seeking to integrate cryptocurrency services, potentially defining how they access the core payment rails of the traditional financial system (TradFi).

The legal standoff between Custodia Bank and the Federal Reserve transcends a single institution’s operational needs. It represents a pivotal conflict over the dual banking system in the United States. Custodia’s argument that the Fed’s denial “undermines state banking authority” strikes at the heart of this system, where states have historically held the power to charter and supervise banks. A ruling in favor of the Federal Reserve could reinforce federal regulators’ ability to effectively veto state-chartered business models they deem risky, particularly in the nascent and controversial crypto sector.

For the cryptocurrency industry, the case is a bellwether. A successful appeal by Custodia would be heralded as a major victory, potentially paving the way for more direct integration of crypto firms into the traditional banking infrastructure. Conversely, a final ruling upholding the Fed’s denial would signal continued high barriers to entry and likely force crypto-native businesses to remain dependent on a limited number of willing traditional banking partners. As the Tenth Circuit considers whether to grant the en banc rehearing, the financial and regulatory communities are watching closely, understanding that the decision will shape the intersection of cryptocurrency, state innovation, and federal power for years to come.