Blockchain Association Backs Custodia Bank to Challenge Fed Account Denial Power

Crypto lobbying group the Blockchain Association has filed an amicus brief supporting the crypto custodian Custodia Bank in its Supreme Court petition where it fights the Fed’s denial of master accounts.

Crypto players seek level playing field

In 2020, the Wyoming-chartered Custodia Bank applied for a Federal Reserve master account. This is essentially a “bank for banks,” or a platform that gives them access to the Fed’s payment rails. 

Without it, banks require middlemen to manage their transactions – something that costs time and money and risks their operations should the intermediary back out. A full master account also earns interest on reserves, benefits from a liquidity safety net, and is granted permanently.

Nonetheless, the Kansas City Fed formally rejected it, citing “undue risk” and crypto-focused operations as a threat to financial stability. This sparked a multi-year legal battle, with Custodia arguing that the Fed is required by law to provide master accounts to any legally eligible depository institution.

Current stance

So far, lower courts have sided with the Fed, ruling that regional reserve banks do not have a say in the matter.

The Blockchain Association and other crypto advocates have stepped in to support Custodia as a way to set a precedent for future rulings. They argue that unchecked federal power will deny crypto service providers foundational banking services.

While the case remains undecided, the Fed recently approved a “limited purpose” master account for Kraken exchange. This “skinny” account does not earn yield on Fed deposits, has zero access to emergency central bank loans, and is limited in terms of risky ventures. It is also granted on a one-year trial period during which it is to provide payment services alone rather than full banking services.

The events happen at a time when the crypto industry eagerly awaits proceedings on the CLARITY Act – a critical piece of legislation that would set the pace for the industry.