The case had dragged on for five years. The court case involved a vote by the United States Court of Appeals for the Tenth Circuit. The judges declined the case by a vote of seven to three. The case had been Custodia Bank’s last attempt to gain access to a master account with the Federal Reserve. The court’s decision upheld previous court rulings on the Federal Reserve’s authority over its own payment infrastructure.
It appears that Custodia Bank first sought a master account in October of 2020 to gain access to central bank systems directly. A master account allows financial institutions to hold reserve accounts directly with a Federal Reserve system. This means that banks that do not have access to a master account must go through an intermediary bank to process payments. The bank argued that federal law allows state-chartered banks to access Federal Reserve services, such as a master account. The courts disagreed with this argument.
The law does not require the Federal Reserve to automatically approve the application of a master account, according to the ruling. The ruling reinforced the fact that the Reserve Banks have the authority to review the risks before the institutions gain access. Regulators had previously turned down Custodia Bank’s application based on the risks of the banking model, which is digital asset-focused. Regulators had previously raised concerns that crypto-related activities could potentially cause risks to the stability of the financial sector as well as the institutions. The ruling reinforced the Federal Reserve’s authority as the gatekeeper of institutions seeking access to the national payment rails.
Judge Timothy Tymkovich disagreed with the majority and gave his reasoning in the form of a dissent. He pointed out the importance of master accounts, stating that an account is “indispensable” for the normal operation of a bank. He went on to say that denying access could be like giving a “death sentence” to a bank. Judge Tymkovich also pointed out that Reserve Banks should not have unlimited discretion in granting master accounts.
The ruling comes at a time when crypto companies are pushing for greater access to traditional financial systems in the US. The crypto industry believes that they could be granted access to direct payments. Thus reducing their need for traditional banking partners. However, the courts have ruled that the relevant authorities have the discretion to decide on the applications of crypto-focused banks.
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