Court closes Custodia fight with Federal Reserve just as Fed opens master-account door

• A federal court denied Custodia Bank's request to review the Federal Reserve's powers as the final word on so-called master accounts.
• The crypto bank's rejection, though, comes at a time when two separate avenues seem to be opening up for access to narrower master accounts.
• One of the regional Fed banks gave Kraken such access, and the national Fed board is working on a nationwide policy for something similar.

A federal appeals court rejected the final bid of crypto bank Custodia to challenge the U.S. Federal Reserve's authority over granting master accounts, but the decision arrives at a time that the central bank is opening other avenues for such accounts.

A Fed master account grants access to the central bank's payment rails and full services, allowing an institution to cut out go-between arrangements, so it's been coveted by emerging crypto banks like Wyoming-chartered Custodia Bank. The bank has been fighting with the Fed for years over the initial rejection of its master-account application, and later over whether the central bank should have the final word on whether or not to grant such access.

The U.S. Court of Appeals for the 10th Circuit revealed on Friday that it declined to hear Custodia's final appeal on that point in a 7-3 vote. However, the latest in a string of legal defeats arrives as the Fed system has cracked a door open on master accounts for crypto firms.

First, a regional bank, the Federal Reserve Bank of Kansas City, recently granted crypto exchange Kraken a special new limited account. Though it's not a full master account, it carries many of the same features, and Kraken is the first crypto firm to get one for its banking arm.

At the same time, the national-level Federal Reserve board is working on a new policy to welcome crypto firms and others into so-called "skinny" master accounts that would likely be similar to Kansas City's approach. That process is still in the early stages, so it's unclear when crypto banks can begin applying.

Custodia representatives didn't immediately respond to a request for comment on Friday's court decision. A person familiar with its efforts said Friday that the bank is still pursuing access.

In a dissent opinion circulated by the court, one of the judges argued for why the rehearing should have been granted. "Holding that the Reserve Banks have unreviewable discretion over master accounts places us on the wrong side of the statutes and, likely, that of the Constitution as well," wrote Judge Timothy Tymkovich. "The case’s consequences for the financial industry and its impact on the state-federal balance in banking regulation make it exceptionally important."

The Kraken success spurred analysts to predict other crypto names may soon join them on the rolls of firms with master accounts, but some who've followed the years-long battle say it'll be slow going and dependent on which region of the reserve-bank system they're in. The real rush of approvals may wait for the Fed to establish a nationwide approach to limited accounts.

Read More: Crypto bank Custodia files petition for a rehearing by all appellate judges

• The European Union’s new MiCA regulations are reshaping the region’s crypto industry by raising regulatory and operational standards, which could reduce the number of lightly regulated platforms.
• SwissBorg, which recently secured a MiCA license and plans to shift its European operations to a newly authorized French entity, aims to expand into major EU markets as some global exchanges scale back in the bloc.
• SwissBorg’s COO expects yield and staking products, particularly those linked to stablecoins, to move toward clearer disclosures and more standardized, transparent structures as regulators push for stricter rules and institutions gradually increase their participation.

Disclosure & Polices: CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. CoinDesk has adopted a set of principles aimed at ensuring the integrity, editorial independence and freedom from bias of its publications. CoinDesk is part of Bullish (NYSE:BLSH), an institutionally focused global digital asset platform that provides market infrastructure and information services. Bullish owns and invests in digital asset businesses and digital assets and CoinDesk employees, including journalists, may receive Bullish equity-based compensation.