FinTechs In Limbo as Court Sides With Fed on Master Account

A “master account” at one of the twelve regional Reserve Banks allows an institution to hold reserves and settle payments without relying on an intermediary bank. The account is tantamount to a gateway that promises faster settlement and lower costs for firms offering new payments products.

But that gate remains firmly controlled by the Federal Reserve, following the Friday (Oct. 29th) decision by the U.S. Court of Appeals for the Tenth Circuit, which upheld the Fed’s discretion to deny access to Custodia Bank, a Wyoming-chartered digital-asset institution.

How Master Accounts Work

As described here (via the Congressional Research Service analysis), banks hold reserve balances in master accounts at the Fed. These accounts serve as the connective tissue of the U.S. payment system, enabling depository institutions to clear and settle obligations among themselves through Fedwire and other wholesale systems. Institutions seeking a master account must apply through the Reserve Bank in their district.

Traditionally, such approvals have been routine for federally insured banks but slower (or have been stalled) for newer entrants like crypto-linked entities, public banks or “narrow” banks that take deposits but make few or no loans. The Fed’s 2022 guidance established a three-tier system of review, with the strictest scrutiny applied to firms that are not federally insured and lack supervision by a federal banking agency. That tier included Custodia, the first digital-asset-focused bank to test the process.

The Court’s Decision

In Custodia Bank v. Federal Reserve Board of Governors and Federal Reserve Bank of Kansas City, the appellate panel concluded, in a 2-1 ruling, that the Reserve Banks retain full discretion to reject master account requests from otherwise eligible institutions.

Writing for the court, Judge Ebel stated that Section 342 of the Federal Reserve Act authorizes a Reserve Bank to “receive deposits” but does not compel it to do so, making the authority discretionary.

Custodia had argued that a separate clause in the 1980 Monetary Control Act — which says Fed services “shall be available to nonmember depository institutions” — required automatic approval. The three-judge panel disagreed on Friday, calling that clause a pricing principle rather than a mandate. “Congress does not hide elephants in mouseholes,” the opinion said, rejecting Custodia’s claim that the Fed was obliged to grant every qualified applicant a master account.

The court also pointed to the 2022 “Toomey Amendment,” which requires the Fed to publish a list of approved, pending, or rejected applications. That statute, the judges wrote, “clearly contemplates that Reserve Banks may reject applications for master accounts from eligible entities,” reinforcing that discretion exists in law.

Why Custodia Was Denied

Custodia, chartered under Wyoming’s Special Purpose Depository Institution framework, sought to serve as a bridge between digital assets and the U.S. dollar system. The Kansas City Fed acknowledged Custodia’s statutory eligibility but determined its crypto-centric business model carried “undue risk” to the payment system and was “highly likely inconsistent with safe and sound banking practices.” Without federal supervision or deposit insurance, the Fed found the proposed structure raised concerns about money-laundering compliance, liquidity management, and potential systemic exposure, which would include the very risks the Fed’s tiered guidance was designed to address.

Industry Reaction

In a statement shared with PYMNTS, the Bank Policy Institute said the decision “affirms the critical role of the Federal Reserve in protecting the safety and soundness of the nation’s payments system.” The BPI added that discretion is “essential to ensure that entities without robust federal oversight or deposit insurance do not introduce unacceptable risk into the core of the banking system,” emphasizing that the Fed “must remain the gatekeeper of last resort.”

The group also noted that the outcome provides legal clarity following years of uncertainty around whether the Fed’s master account process was ministerial or judgment-based. “The Tenth Circuit has now confirmed that the Reserve Banks are not compelled to grant accounts to every applicant that meets a technical definition of ‘depository institution,’” BPI stated.

Implications for ‘Skinny’ Accounts and Future Applicants

The ruling effectively validates the Fed’s approach to novel charter types. It also raises questions for firms pursuing so-called “skinny” accounts — limited-purpose Fed accounts that would allow payment or settlement access without full participation in the reserve system. PYMNTS reporting in recent weeks has noted that the Fed has considered such limited access structures for narrowly defined use cases but has not moved forward amid legal uncertainty.

For applicants, the path toward Fed connectivity is no sure thing.