Custodia v. FRBKC: A New Responsibility for Crypto Banking

Tristan Ramon

Edited by Keerthi Chalamalasetty, Marissa Ambat, Mac Kang, and Sahith Mocharla

On October 31 2025, while most were opening their front doors to trick-or-treaters, the Federal Reserve Bank of Kansas City shut its door on Custodia Bank. In a two-to-one decision, the Tenth Circuit Court of Appeals granted the Federal Reserve discretion over whether cryptocurrency-focused banks, like Custodia, may reach into the Federal Reserve’s enormous pumpkin bucket of depository funds [1]. With Custodia being one of many “novel charter” banks in the current banking landscape, its longstanding legal dispute over access to the Federal Reserve represents a broader struggle to integrate contemporary banking models with cutting-edge technologies [2]. By affirming that modern banks’ fiscal eligibility is interpretive, Custodia Bank v. Federal Reserve Bank of Kansas City leaves Federal Reserve System membership opaque and unreliable despite its importance to the national banking system. If financial institutions like Custodia are to be integrated reliably in coming years, Congress or the Federal Reserve itself will be required to clarify nationwide standards. However, considering the limitations of top-down change from Congress or the Federal Reserve, institutional self-reform is the most realistic and efficient path forward for novel banks.

I. CONTEXT

Master accounts are central to the federal banking system; they allow member institutions to directly circulate deposits and settlements through the Federal Reserve and, most importantly, fellow member institutions. As a result of these benefits, master account access is heavily sought after by rising banks hoping to maximize depository efficiency. Nationally, master accounts enable the processing of trillions of U.S. dollars in annual transactions as well as the secure management of monetary reserve requirements that stabilize the money supply. Custodia Bank Inc. (“Custodia”), founded by Wall Street veteran Caitlin Long, pursued access to the nation’s financial infrastructure by applying for a master account through the Federal Reserve Bank of Kansas City (“Board”) in 2020 [3] [4]. One year later in August 2021, Custodia submitted an additional application to the Board for official membership with the Federal Reserve System [5]. 

Before Custodia v. FRBKC, applications like Custodia’s were assessed according to public, well-defined eligibility standards requiring legal clearance as a depository institution. Considering that Custodia Bank was founded as a Special Purpose Depository Institution under Wyoming law, it already fulfilled the Federal Reserve’s eligibility standards. Despite this fact, Custodia’s applications remained pending for over 19 months, prompting Custodia to file suit against the Board in June 2022. The bank alleged a violation of the Administrative Procedure Act (“APA”) due to an “unreasonable delay” and unlawful refusal to act [6]. 

Only in January 2023, seven months after Custodia filed suit, did the Board publish an order denying Custodia’s applications. This denial drew upon an unprecedented assessment of Custodia’s eligibility beyond clear-cut national standards. According to the Board, members considered Custodia’s ability to manage a variety of financial risks, including liquidity-based, operational, and cybersecurity risks associated with its crypto-focused business model [7]. In response, Custodia amended its complaint, reframing the core legal issue as to whether the Board had the statutory discretion to deny a master account to an already eligible institution in the first place. When the U.S. District Court for the District of Wyoming ruled against Custodia in March 2024 and dismissed Custodia’s claims against the Board, Custodia sought appellate review [8]. Ultimately, on Halloween 2025, the Tenth Circuit Court of Appeals upheld the initial District Court ruling and recognized the Board’s discretion in considering applicant bank eligibility beyond historical standards [9].

II. DISCRETION AND CONSTITUTIONAL TENSION

The Tenth Circuit embraced a statutory interpretation holding that Federal Reserve Banks retain broad discretion to deny master accounts to eligible institutions that pose unacceptable risks to financial stability or payment system integrity. The court anchored its conclusion in three distinct provisions of federal law.

First, § 342 of the Federal Reserve Act (“FRA”), enacted in 1913, provides that “[a]ny Federal reserve bank may receive from any of its member banks, or other depository institutions, … deposits” [10]. Here, the court delineated between the verbs “may” and “shall,” concluding that the FRA does not compel Federal Reserve banks to receive deposits from all eligible institutions.

Second, § 248a of the Depository Institutions Deregulation and Monetary Control Act (“MCA”), enacted in 1980, directs the Board to extend fee schedule services to banks that are not members of the Federal Reserve [11]. According to this clause, “all Federal Reserve bank services covered by the fee schedule shall be available to nonmember depository institutions and such services shall be priced at the same fee schedule applicable to member banks” [12]. While Custodia argued that § 248a of the MCA requires the Board to provide a master account to every eligible nonmember depository institution—because a master account is considered prerequisite for the availability of services to “nonmember depository institutions”—the court disagreed, concluding that the MCA does not carry enough weight to override the discretion granted by Congress through the FRA [13]. Considering that the MCA was specifically enacted to target Federal Reserve pricing principles over the money supply, the majority found it would therefore not be a suitable medium to set the precedent for the indirectly related issue of master account access. As the Court reminded us, Congress “does not hide elephants in mouseholes,” nor does it smuggle major structural changes inside minor clauses [14]. 

Finally, the “Toomey Amendment” (§ 248c(b)(1)(B)), enacted in 2022 to increase the accountability and transparency of the federal banking system, requires the Board to create a public database listing the status of master account applications as “approved,” “rejected,” “pending,” or “withdrawn.” The court reasoned that Congress’s express legislative inclusion of a “rejected” status necessarily implies that the Board has the discretionary power to deny an application [15].

Judge Timothy Tymkovich dissented, providing hope for the near-future integration of novel charter banks like Custodia. His opinion opens with a critique of the federal banking system itself, noting that in the technical sense, regional boards are not exactly federal. In fact, regional board members like those of the Federal Reserve Bank of Kansas City are made up of private sector bankers and stakeholders that are neither appointed by the President nor approved by Congress. Therefore, a ruling in favor of Board discretion places significant financial power in the hands of unchecked agents with potentially substantial interests in the industry of federal banking. 

As articulated by Judge Tymkovich, this may violate a foundational principle of the national system of checks and balances: the U.S. Constitution's Article II, Section 2 “Appointment Clause” requires that powerful inferior officers exercising significant federal authority must be appointed through a process defined by Congress. Master account discretion, or the ability to decide which financial actors have access to the full network of domestic transactions, has political and economic implications that make it an enormous public power. Control over master accounts allows boards to decide which institutions may access the Federal Reserve’s balance sheet and low-cost liquidity—a responsibility that far exceeds the threshold of “power” set forth by the Constitution [16]. Under the Tenth Circuit’s ruling, regional board directors elected by private banks are therefore expected to make powerful governmental decisions within their own industry of private banking. If this new power is to align with the Constitution and stay answerable to public rather than private interests, reform is required.

For cryptocurrency-focused banks, the combined effect of statutory discretion and constitutional ambiguity creates a high-variance environment in which legal eligibility is nowhere near sufficient to ensure reliable access to the Federal Reserve. Most notably, the result eliminates the prospect of a robust national standard. Whereas pre-Custodia applicant banks could rely on the well-articulated eligibility standards of the central Federal Reserve, the Tenth Circuit established a subjective standard of risk assessment conducted by private, unelected actors. The values and metrics used in these assessments are both obscure and inconsistent, producing considerable uncertainty for developing banks that can no longer rely on a clear standard for entry.

Additionally, the broad discretionary power affirmed by the Tenth Circuit directly affects administrative efficiency and regulatory transparency. This was first demonstrated by Custodia’s suit targeting the Board’s extended period of application review. If other federal boards apply the Board’s precedent of deliberation over the suitability of applicant banks, the 19 months of delay experienced by Custodia is likely to become a national standard. Even if regional boards attempt to mitigate the issue of national variability by consulting the central Federal Reserve, as did the Board in the case of Custodia, high-volume backlogging would inevitably compound over time. The result is a significant deterioration of national reliability, accessibility, and transparency in the federal admission process. This leaves novel applicant banks facing potential delays of multiple years, unable to make strategic decisions as surrounding financial technologies and regulatory landscapes rapidly evolve.

III. LIMITS OF TOP-DOWN REFORM

A statutory solution would require Congress to rewrite the basic allocation of authority in the FRA and MCA by avoiding permissive language or specifying risk-based exclusions. In principle, this legislative fix would convert language in § 342 of the FRA from “may” to “shall,” compelling Reserve Banks to accept deposits from all institutions that satisfy a list of objective criteria. Concurrently, Congress would need to revise § 248a of the MCA to explicitly state that access to fee-schedule services presupposes access to a master account, subject only to narrowly enumerated grounds for denial like sanction violations or documented deficiencies in safety and soundness. Such a package would create a genuine entitlement to account services, limiting subsequent litigation to disputes over whether the unambiguous grounds for refusal are actually present. However, the recent history of major financial legislation demonstrates the near-insurmountable political barrier hindering such top-down reform [17] [18]. The Dodd-Frank Wall Street Reform and Consumer Protection Act, widely described as the most far-reaching overhaul of U.S. financial regulation since the New Deal, only emerged in response to the systemic crisis of 2007 to 2009. Notably, it still required Congress to delegate substantial detail to agencies that spent years completing a framework of oversight bodies and derivative rules to stabilize a reestablished banking system [19]. Subsequent enactments, such as the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, have focused on recalibrating existing thresholds for community banks rather than fundamentally restructuring the internal allocation of power within the Federal Reserve System [20]. Historically, post-2008 legislation does not establish convincing grounds for Congress to enact major reform over the heretofore unconsidered case of cryptocurrency-focused banks. This concern is amplified by such banks’ dependence on a dynamic technological landscape, demanding updated Congressional reform amidst political rulemaking. For such institutions, the idea of a bespoke statutory fix is currently little more than speculation.

Digital asset legislation in the current Congress additionally reflects fragmentation, with competing proposals that alternately stress consumer protection, market integrity, or innovation without directly addressing master account entitlements [21]. Such disparate values are amplified by partisan tensions, evidenced by the example of President Trump’s October 2025 pardon of Changpeng Zhao, founder of the world’s largest cryptocurrency exchange, Binance [22]. In this setting, a bill that would constrain Reserve Bank discretion for the benefit of a narrow class of cryptocurrency-oriented depositories is likely to be sidelined in committee or reduced to limited transparency measures like those provisioned by the Toomey Amendment [23]. Congressional amendment, therefore, does not function as a credible basis for strategic planning by novel banks that must make investment and entry decisions on a short timeframe.

Next, the Board of Governors of the Federal Reserve System has already employed administrative tools to bring greater structure to master account decisions, and its guidelines illustrate both the strengths and limitations of that approach [24]. Such rules articulate high-level principles and list factors that Reserve Banks should weigh, including safety and soundness, compliance with money laundering prohibitions, and legal authority under federal and state law [25]. Further, they introduce a three-tier framework that distinguishes between the treatment of insured institutions, non-insured yet supervised institutions, and novel charters. These clarifications respond to the aforementioned criticism that the previous practice had been opaque and idiosyncratic across districts, and they provide applicants a slightly more concrete sense of the questions being considered during review [26]. Nevertheless, the Board describes the guidelines as policy rather than as binding rule, and repeatedly stresses that they do not create a private right of action or an automatic entitlement to services [27]. Reserve Banks retain the ability to deny an application when they conclude that the profile of the institution presents novel risks, regardless of updated eligibility standards. Ultimately, such guidelines do not impose firm timelines, do not require that denials be justified in terms amenable to judicial review, and do not displace the statutory reading that treats FRA § 342 as permissive. Administrative refinement narrows the range of plausible outcomes and marginally improves the information available to applicants, but leaves intact the core premise that master account access is governed on a subjective case-by-case basis. For novel institutions, this unmoving federal stance lacks any expectation that the path forward will lead to much-needed master accounts.

The combination of these legal and institutional dynamics confirm that cryptocurrency banks cannot reasonably treat courts, Congress, or the Federal Reserve as reliable primary instruments for securing master account access. During the entire period between 2020 and 2025, Custodia operated under a cloud of regulatory uncertainty that severely hampered its ability to raise capital, design products, and secure counterparties dependent on predictable access to payments. Future litigation will likely encounter similar constraints, as courts are reluctant to override agency interpretations of ambiguous statutes in complex financial domains due to principles of administrative deference [28] [29]. Legislative processes move on comparable timelines and are subject to shifting political and macroeconomic priorities that individual firms cannot control. 

In sharp contrast, cryptocurrency-focused banks must make strategic commitments on a much shorter cycle that reflects investor expectations, technology development, and competition from incumbent institutions possessing stable account relationships. If novel charter banks assume that law will soon transform discretion into codified standards, they risk building valuations and technology stacks presuming master account access that ultimately is not guaranteed. A more defensible and viable approach is to treat judicial, legislative, or administrative top-down reform as a potential long-run benefit while prioritizing the near term through bottom-up institutional adjustments. This strategy demands focusing on internal measures that reduce perceived risk and facilitate Reserve Bank approval within the post-Custodia discretionary framework. The onus now rests on novel charter banks to de-risk themselves.

IV. THE INSTITUTIONAL PATH FORWARD: FIRM-LEVEL STRATEGIES

Wyoming’s Special Purpose Depository Institutions (“SPDIs”) are explicitly designed to act conservatively and mitigate traditional credit risk. Under SPDI status, these institutions must hold customer fiat deposits in fully reserved form, backed one hundred percent by transparent and liquid Level One assets such as U.S. currency; critically, such banks are prohibited from making loans with those deposits [30] [31]. SPDI institutions typically forego federal deposit insurance, since their deposits are fully reserved—a distinction that positions them outside the traditional federal safety net designed for fractional-reserve commercial banks [32] [33]. Despite these statutory guardrails that decrease credit and solvency risk, critics argue that this model can still create liquidity and valuation risk. Such a concern arises because “unencumbered liquid assets” may include instruments that are subject to price volatility and, notably, the fragility of cryptocurrency as a relatively new asset subject to cybersecurity risks. Therefore, SPDI holdings may not be immediately convertible to cash during a stress event. The Board’s order against Custodia, a registered SPDI, explicitly framed its cryptocurrency-focused and uninsured business plan as novel and unprecedented, finding it inconsistent with requisite financial and managerial factors for the membership in the Federal Reserve System [34]. This position means that firm-level strategies of future SPDI applicants must extend beyond statutory compliance to address federal risk concerns.

One response is for SPDI institutions to prioritize closer alignment with familiar prudential regimes by seeking federal or cooperative supervision, incorporating deposit insurance where feasible, and holding reserve assets in highly conservative portfolios that resemble those of more traditional banks. This approach would parallel the Federal Reserve’s underlying goal to bring “novel activities” related to cryptocurrency assets and financial technology back into the ordinary and predictable supervisory process, thereby decreasing the unquantified financial risk perceived by the Board [35] [36]. One promising institutional compromise to emerge from this dialogue is Governor Waller’s recent proposal for “skinny” master accounts, which would provide access to payment rails without interest, overdrafts, or discount window access [37]. Novel banks that voluntarily tailor their operations and risk profile to this kind of limited account, framed within a robust supervision and liquidity framework, can credibly argue that their prudential risk is sufficiently contained despite the novelty of their charter.

Next, robust governance and voluntary disclosure choices can significantly strengthen or undermine novel banks’ efforts to lower perceived financial risk. International precedent offers a valuable reference: the Basel Committee on Banking Supervision, which has historically defined G10 nations’ standards for capital regulation, discloses a framework for cryptoasset exposures that sets out standardized templates for both qualitative and quantitative information that banks should provide. This framework, under Pillar Three, is explicitly designed to unmask information asymmetries and support market discipline [38]. Although non-binding, that framework provides a natural benchmark for SPDI institutions to emulate. Such institutions should facilitate supervisory understanding of risk by publishing transparent balance sheets and exposure breakdowns that follow these templates, coupled with the adoption of conservative accounting policies for fair value measurement and revenue recognition. Novel banks that establish independent risk committees, conduct rigorous stress tests for cryptocurrency exposures, and regularly release scenario analyses aligned with the Basel disclosure approach can use their financial statements as a signal that their profile is reliable along the dimensions relevant to prudential oversight.

Over time, these proactive firm-level choices can influence the evolution of formal law and regulation. The Federal Reserve’s account access guidelines already identify “novel charters” as a distinct category and attempt to organize risk-based criteria for evaluating their applications while preserving substantial discretion for Reserve Banks [39] [40]. If a critical mass of cryptocurrency-focused institutions collectively adopt conservative balance sheets, credible disclosure frameworks, and infrastructure-first business models before operating through partnerships or limited master accounts, they will generate an empirical record that undercuts claims about unmanageable systemic risk. This documented record of success would provide a far stronger regulatory footing for the Board to comfortably approve future applicants in the short term, and would incite the Federal Reserve or Congress to enact reform that codifies more neutral and objective access standards over the long term. 

Industry responses to the rise of cryptocurrency warn that excessively conservative treatment risks creating a bifurcated market between regulated banks and non-bank cryptocurrency firms, urging recalibration on behalf of novel charters themselves [41]. If banks like Custodia demonstrate in practice that they can internalize prudential expectations and thereby reduce that bifurcation, the political and institutional barriers of neutral master account accessibility rules are likely to diminish.

V. CONCLUSION

Ultimately, Custodia Bank v. Federal Reserve Board of Kansas City represents the broader adaptability of the federal banking system to developing institutions like SPDI depositories. While the Tenth Circuit’s opinion leaves much unresolved ambiguity for novel charters that rely on transactional efficiency, it is clear that neither Congress nor the Federal Reserve is well-suited to address master account access in the status quo. Top-down reform is limited by political confoundment and the prioritization of Board flexibility, leaving the most reliable path forward for novel charter banks as that of firm-level change toward more conservative and compliant business models.

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[1] Custodia Bank v. Fed. Reserve Bd., No. 24-8024 (10th Cir. Oct. 31, 2025),

 https://business.cch.com/BFLD/CustodiaBankFed%2810thCir%29Op_10312025.pdf

[2] Matthew Bisanz et al., Federal Reserve wins two master account lawsuits: Insights: Mayer Brown Mayer | Brown (2024), https://www.mayerbrown.com/en/insights/publications/2024/04/federal-reserve-wins-two-master-account-lawsuits 

[3] Caitlin Long, About Caitlin: Blockchain consultant Caitlin Long (2023), https://caitlin-long.com/about-caitlin/

[4] Federal Reserve Board publishes its order denying the application by Custodia Bank, Inc., to be supervised by the Federal Reserve, Board of Governors of the Federal Reserve System (2023), https://www.federalreserve.gov/newsevents/pressreleases/orders20230324a.htm 

[5] see [4]

[6] Brief of Amicus Curiae Am. Bankers Ass'n in Support of Appellees, Custodia Bank, Inc. v. Fed. Reserve Bd., No. 24-8024 (10th Cir. Sept. 4, 2024), https://www.aba.com/advocacy/policy-analysis/custodia-v-federal-reseve-0952024

[7] David E Teitelbaum & Michael D Lewis, U.S. Federal Reserve Board denies Crypto Bank application for reserve system membership based on “fundamental concerns” Insights | Sidley Austin LLP (2023),

https://www.sidley.com/en/insights/newsupdates/2023/03/fed-reserve-board-denies-crypto-bank-application-for-membership-based-on-fundamental-concerns

[8] District Courts refuse to order Federal Reserve to grant master accounts to Custodia and PayServices, Davis Polk (2024), https://www.davispolk.com/insights/client-update/district-courts-refuse-order-federal-reserve-grant-master-accounts-custodia 

[9] see [1]

[10] see [1]

[11] see [1]

[12] see [1]

[13] see [1]

[14] see [1]

[15] see [1]

[16] No automatic right to a fed master account: Tenth Circuit Confirms Reserve Bank Discretion and limits APA Review in Custodia Bank v. FRBKC, https://www.casemine.com (2025), https://www.casemine.com/commentary/us/no-automatic-right-to-a-fed-master-account:-tenth-circuit-confirms-reserve-bank-discretion-and-limits-apa-review-in-custodia-bank-v.-frbkc/view. 

[17] The Dodd-Frank Wall Street Reform and Consumer Protection Act: Background and Summary (2025), https://www.congress.gov/crs-product/R41350.

[18] Saule T. Omarova, The Dodd-Frank Act: A New Deal for a New Age, 15 N.C. Banking Inst. 83 (2011), https://scholarship.law.unc.edu/ncbi/vol15/iss1/6

[19] see [17]

[20] Jeffrey D. Haas et al., Regulatory relief act benefits community and regional banks: Insights Holland & Knight (2018), https://www.hklaw.com/en/insights/publications/2018/06/regulatory-relief-act-benefits-community-and-regio.

[21] Banking and Cryptocurrency: Policy Issues (2025), https://www.congress.gov/crs-product/R48430.

[22] Liv McMahon, US President Trump Pardons Binance founder Changpeng Zhao BBC News (2025), https://www.bbc.com/news/articles/cly1qrl9l1qo.

[23] see [8]

[24] Guidelines for Evaluating Account and Services Requests, Board of Governors of the Federal Reserve System. (2022), https://www.federalregister.gov/documents/2022/08/19/2022-17885/guidelines-for-evaluating-account-and-services-requests.

[25] see [24]

[26] Yany Aibangbee, BPI comments on Federal Reserve Revised Guidelines for Evaluating Account and Services Requests, Bank Policy Institute (2024), https://bpi.com/bpi-comments-on-federal-reserve-revised-guidelines-for-evaluating-account-and-services-requests/ 

[27] see [24]

[28] see [8]

[29] Randall D. Guynn et al., Davis Polk Discusses Rulings on Fed’s Denial of Master Accounts to Custodia and PayServices CLS Blue Sky Blog (2024), https://clsbluesky.law.columbia.edu/2024/04/16/davis-polk-discusses-rulings-on-feds-denial-of-master-accounts-to-custodia-and-payservices/ 

[30] Special Purpose Depository Institutions, Division of Banking, https://wyomingbankingdivision.wyo.gov/banks-and-trust-companies/special-purpose-depository-institutions.

[31] ​​HB0074 - Special Purpose Depository Institutions., State of Wyoming 68th Legislature (2019), https://www.wyoleg.gov/Legislation/2019/hb0074. 

[32] What’s in a Charter? Bank Policy Institute (2025), https://bpi.com/whats-in-a-charter/

[33] see [6]

[34] see [1]

[35] Novel Activities Supervision Program, Board of Governors of the Federal Reserve System (2025), https://www.federalreserve.gov/supervisionreg/novel-activities-supervision-program.htm

[36] Pete Schroedor, Fed to scrap program devoted to policing banks on Crypto, Fintech activities | Reuters Reuters (2025), https://www.reuters.com/sustainability/boards-policy-regulation/fed-scrap-program-devoted-policing-banks-crypto-fintech-activities-2025-08-15/

[37] Fed’s Waller Proposes “Skinny Master Account,” ICBA (2022), https://www.icba.org/w/fed-s-waller-proposes-skinny-master-account

[38] Disclosure of Cryptoasset Exposures, The Bank for International Settlements (2024), https://www.bis.org/bcbs/publ/d580.htm

[39] Amanda L Baker et al., Master Account Access Guidelines Finalized by US Federal Reserve: Insights: Mayer Brown Mayer | Brown (2024), https://www.mayerbrown.com/en/insights/publications/2022/08/master-account-access-guidelines-finalized-by-us-federal-reserve

[40] Rachael Kennedy, After Custodia, Can Crypto Banks Still Reach the Fed? Payment Expert (2025), https://paymentexpert.com/2025/11/05/after-custodia-can-crypto-banks-still-reach-the-fed/ 

[41] ICMA co-signs joint trade association response to BCBS consultation on Banks’ disclosure of crypto-asset exposures, ICMA (2024), https://www.icmagroup.org/News/news-in-brief/icma-co-signs-joint-trade-association-response-to-bcbs-consultation-on-banks-disclosure-of-crypto-asset-exposures/