A federal court in Denver has dealt a significant blow to Custodia Bank, the Wyoming-based digital asset institution that sought direct access to the Federal Reserve’s payment system.
In a ruling that could shape the future relationship between crypto banks and traditional financial regulators, the Tenth Circuit Court of Appeals upheld the Fed’s right to deny master account privileges to institutions it considers risky, even if they meet basic eligibility standards.
A Clash Between Innovation and Oversight
Custodia’s lawsuit, originally filed in 2022, argued that the Federal Reserve had an obligation to provide master accounts to all eligible banks, including those with state charters like its own. A master account would have allowed Custodia to interact directly with the Fed’s clearing and settlement systems — bypassing intermediary banks and enabling faster, more efficient payments for crypto-related businesses.
But the appellate judges disagreed, concluding that while Custodia may technically qualify as a depository institution under federal law, the Federal Reserve’s regional branches retain full discretion over which applicants they approve. Writing for the majority, Judge David Ebel — a Reagan-era appointee — said that granting automatic access “would remove an essential safeguard” designed to protect the broader banking system from operational or liquidity risks.
The decision effectively confirms that the Fed can deny access to institutions with unconventional or high-risk business models, such as those heavily involved in cryptocurrency custody or trading. The ruling cited the Kansas City Federal Reserve’s earlier findings that Custodia’s crypto-heavy operations represented “excessive risk” to the stability of the U.S. financial sector.
A Divided Decision Reflecting Broader Tensions
While two judges agreed to uphold the lower court’s dismissal, one member of the panel — Judge Timothy Tymkovich, appointed by President George W. Bush — dissented. Tymkovich argued that the statutory language governing master accounts was clear: eligible non-member banks should not face discrimination or selective denial. He contended that allowing the Fed to pick winners and losers among banks undermines fair competition and stifles innovation within the financial system.
Legal experts note that the split decision underscores a growing ideological divide in U.S. financial regulation — one that pits the Fed’s cautious approach to digital assets against industry demands for a level playing field. “This wasn’t just about Custodia,” said financial law professor Melissa Hsu of Georgetown University. “It’s about whether crypto-native banks can ever gain equal access to the rails that move money in America.”
Ripple Effect for the Crypto Banking Sector
The ruling is the latest setback in the long battle between crypto firms and U.S. financial gatekeepers. Custodia, founded by former Morgan Stanley executive Caitlin Long, was one of several digital asset institutions seeking state-regulated pathways into the traditional banking system through Wyoming’s Special Purpose Depository Institution (SPDI) framework.
These SPDIs were designed to operate under strict capital requirements and transparency rules while offering custody and settlement services for digital assets. However, without access to the Fed’s master accounts, their ability to compete with federally chartered banks remains limited.
Custodia’s loss could discourage other blockchain-focused banks from pursuing similar litigation — at least for now. “This decision keeps crypto banking in a holding pattern,” said Hsu. “Until there’s clearer federal guidance or a shift in policy, these institutions will continue to operate at the margins.”
A Broader Policy Shift on the Horizon?
While the verdict strengthens the Fed’s authority, the regulatory landscape could change in the coming years. Chair Jerome Powell’s term is nearing its end, and speculation is mounting that his successor — potentially appointed by the current administration — could adopt a more accommodative stance toward digital assets. Some policymakers argue that integrating crypto institutions under the Fed’s supervision could enhance oversight rather than increase systemic risk.
Major players in the crypto sector, including Ripple, have already echoed Custodia’s argument, calling for a pathway to master account access that doesn’t exclude blockchain-based firms. They argue that bringing crypto banks into the Fed’s ecosystem would reduce shadow banking risks and allow regulators greater visibility into digital asset flows.
A Turning Point for Crypto and Central Banking
For now, the court’s decision cements the Fed’s position as the ultimate gatekeeper between traditional finance and the crypto economy. Custodia’s next move — whether an appeal to the Supreme Court or a strategic shift in business model — will be closely watched by an industry that sees institutional access as the final barrier to legitimacy.
“The case wasn’t just about one bank,” said economist Daniel Krane. “It was about defining the boundaries of innovation inside the U.S. financial system. The Fed just made clear that crypto still sits outside those walls — at least for now.”
