Custody Bank is fighting the federal government’s denial of master accounts and challenging the federal government’s override of state-chartered crypto banks, raising constitutional questions.
Wyoming’s SPDI model is facing a test as Custodian Bank argues that the Fed’s discretion is stifling innovation and accelerating the crypto industry’s search for alternative payment systems.
Custodia Bank, a Wyoming-chartered crypto-only bank, has taken its legal battle with the US Federal Reserve to the next level. After years of pushback, the bank is now asking the 10th Circuit Court of Appeals to reconsider the Fed’s refusal to grant it a master account.
The case sparks a larger debate over who really controls access to the U.S. financial system. At the heart of the controversy is whether federal regulators can effectively override state-chartered banks without clear legal restrictions.
Why is the Fed Master Account important?
A master account with the Federal Reserve is not an option for banks. Provides access to core payment systems such as wire transfers and Automated Clearing House (ACH). Without this, banks cannot operate normally, regardless of their legal status.
Custodial claims that it meets all requirements to qualify as a nonmember depository institution under federal law. However, the Kansas City Fed rejected the application, and the bank’s operations remained frozen. Custodia argues that this makes Wyoming’s decision to establish a bank virtually meaningless.
National innovation vs. federal control
Wyoming introduced a Special Purpose Depository Institution (SPDI) framework in 2020 to attract digital asset companies while minimizing risk. This model creates one of the strictest crypto banking systems in the United States by requiring full reserve backing and prohibiting traditional lending.
Custodia argues that the Fed’s decision undermines this framework and sets a dangerous precedent. Once the Federal Reserve is free to deny access, state-level innovation in banking becomes largely symbolic.
Constitutional red flag raised
Custodia’s petition exceeds the state’s authority and raises constitutional concerns. The bank argues that giving regional Fed presidents unlimited discretion would make them powerful federal actors without proper constitutional appointments. Because these officials are selected through a mixed public-private process, Custodia said this level of authority could violate the Appointments Clause and raise serious questions about accountability and oversight.
Judges split as pressure mounts
The issue has already divided judges in the 10th Circuit. Opponents emphasized that the Financial Control Act clearly states that the Fed’s services “shall be made available” to eligible institutions. Opponents warned that allowing unlimited discretion would raise legal and constitutional problems. The split has fueled Custodia’s bid for a full retrial in court.
Notably, recent findings from the Office of the Comptroller of the Currency showed that major U.S. banks imposed inappropriate restrictions on legitimate businesses, including crypto companies, from 2020 to 2023. The issue gained political attention after President Trump signed an executive order aimed at preventing banks from denying service solely on the basis of crypto transactions.
Crypto industry reaction
The crypto community reacted sharply, arguing that Custodea’s lawsuit reveals why trust in traditional banking rails is waning. Many see this rejection, despite strict safeguards, as evidence that innovation can be thwarted by opaque federal discretion.
As a result, industry voices say the lawsuit will strengthen the push for blockchain-based parallel payment systems that don’t rely on centralized gatekeepers.
Discover more from Earlybirds Invest
Subscribe to get the latest posts sent to your email.
