Custodia has been vying for a master account that would enable it to access the Fed's payment services. After prolonged delays, its initial application was rejected back in January 2023 — with the central bank concluding there were "significant safety and soundness risks." The company mounted a court challenge to argue that the Fed was required to grant membership to all legally eligible institutions, but this argument has now been dismissed by a judge.
Caitlin Long, Custodia's CEO, wasn't shy in expressing her views about the ruling and said an appeal is being strongly considered, telling CNBC:
"We’re still a U.S. dollar banking business through partner banks. Obviously we’ve had one hand tied behind our back, or arguably two hands behind our back — because unfairly and illegally in my view, we’ve not been able to get a master account. But this is not over yet."
The thrust of Long's argument is this: right now, there's a glaring disparity between the crypto ecosystem and traditional banking infrastructure. While Bitcoin never sleeps, Fedwire's system only operates on weekdays. And given the feverish interest in BTC ETFs, this is causing a backlog of transactions.
Crypto-focused banks had established their own systems to get around this, but they died when Silvergate and Signature went bust. While she argues that both of these institutions "deserved to fail," Long maintains that failing to preserve their infrastructure and synchronize settlements between USD and BTC was (and is) a big mistake. In her eyes, giving Custodia the green light for a master account would ultimately help reduce risk and fill that void.
The law firm Davis Polk believes there's a "substantial possibility" that Custodia may take this battle all the way to the Supreme Court — and points to past cases that could aid the bank's argument. A notable example concerns Fourth Corner Credit Union, which offers financial services to businesses in the marijuana sector. Back in 2017, a judge had ruled it was entitled to a master account as a matter of law.
Custodia's case also relates to a wider issue, in that Federal Reserve banks are now using their discretion in determining who gets access to master accounts — breaking away with decades of convention. Another law firm, Mayer Brown, warned this could lead to "potentially opaque decisions on individual applications."
The U.S. Securities and Exchange Commission was previously rapped on the knuckles for arbitrarily denying Bitcoin ETF applications — and after years of toing and froing, eventually allowed products based on BTC's spot price to hit the market. The Fed continues to take a staunch position of its own, but it may be some time before its stance against Custodia and other crypto banks thaws.
By name and by nature, Long is signalling she's not going down without a fight.
