Caitlin Long’s digital asset-focused financial institution, Custodia Bank, has suffered a significant legal defeat in its ongoing struggle to gain direct access to the U.S. Federal Reserve’s core payment infrastructure. A federal appellate court has upheld a previous decision denying Custodia’s application for a Fed master account, marking yet another obstacle in the bank’s multi-year pursuit to integrate crypto-related services into the traditional banking system.
The U.S. Court of Appeals for the Tenth Circuit issued its ruling on Friday, affirming a lower court judgment from the District of Wyoming. The panel of three judges agreed with the Federal Reserve’s stance, effectively closing the door—at least for now—on Custodia’s access to the central bank’s payment and settlement systems. The court’s decision arrives nearly four years after Custodia initially filed its application in October 2020.
Although Custodia has faced numerous delays and legal challenges, the bank remains undeterred. In a public statement issued after the ruling, Custodia indicated it is “actively considering” requesting a rehearing from the appellate court, signaling that the legal fight may not yet be over.
The dispute centers on Custodia’s attempt to secure a Federal Reserve master account, a critical tool that allows banks to directly access the Fed’s payment rails, including the ability to clear transactions, settle funds, and participate in the U.S. financial system without intermediary banks. Gaining such access would significantly enhance Custodia’s operational capabilities and legitimacy, especially within the crypto sector.
However, the Federal Reserve has consistently raised concerns about the risk profile of Custodia’s business model. In January 2023, the Federal Reserve Bank of Kansas City formally rejected Custodia’s application, citing risks associated with the bank’s focus on digital assets and its deviation from traditional banking practices. The Fed argued that granting such access could pose threats to monetary policy implementation and financial stability, given the volatile and largely unregulated nature of crypto markets.
Custodia had anticipated this rejection and filed a lawsuit against the Federal Reserve in 2022, alleging unjustified delays in processing its application. The bank claimed that the Fed’s foot-dragging was not only unlawful but also strategically designed to exclude crypto-native institutions from accessing the mainstream banking ecosystem.
The appellate ruling emphasized that despite the modern context involving digital currencies and blockchain technology, the underlying legal questions are rooted in longstanding interpretations of central banking powers. “This case comes clothed in 21st-century terms—cryptocurrency, digital assets, instant wire transfers, and master accounts,” the court wrote. “But there is nothing new about this issue. Courts have been interpreting the authority of the central bank since its inception.”
Founded by Wall Street veteran and blockchain advocate Caitlin Long, Custodia (originally launched as Avanti) was one of the first crypto-centric banks established under Wyoming’s crypto-friendly legislation. The state had implemented a series of regulatory reforms aimed at attracting blockchain businesses, positioning itself as a hub for financial innovation. In 2022, the company rebranded to Custodia to better reflect its institutional-grade aspirations.
Despite the setback, Custodia continues to develop its infrastructure for digital asset banking. The company has recently partnered with Vantage Bank to explore tokenized deposit platforms, signaling an ongoing commitment to bridging traditional finance with blockchain-based services.
Looking ahead, Custodia’s legal team may pursue further appeals or potentially escalate the matter to the U.S. Supreme Court, although such a move would face steep procedural and legal hurdles. Alternatively, the bank could attempt to revise its business model or risk profile in a way that addresses the Fed’s regulatory concerns, though this could require significant structural changes.
The broader implications of the case extend beyond Custodia itself. The decision highlights the ongoing tension between emerging crypto-native financial players and legacy regulatory institutions. While innovation in the financial sector accelerates, regulators remain cautious about integrating entities that operate outside traditional frameworks, especially when systemic risk and consumer protection are at stake.
Moreover, the case underscores the lack of clarity surrounding the legal rights of nontraditional financial institutions when seeking access to central bank services. Unlike traditional banks, which often receive master accounts as a matter of routine, crypto banks like Custodia face heightened scrutiny and ambiguous legal pathways.
Industry stakeholders are closely watching the outcome, as it may set a precedent for how U.S. regulatory bodies treat other digital asset firms seeking similar access. If Custodia is ultimately unable to secure a master account, it may deter other crypto institutions from pursuing direct integration with the federal banking system and instead push them toward alternative, decentralized settlement solutions.
At the same time, the Federal Reserve’s cautious stance reflects broader concerns about the evolving role of central banks in the digital age. With the rise of stablecoins, central bank digital currencies (CBDCs), and tokenized finance, the Fed must balance innovation with systemic safeguards. Granting master account access to crypto banks could accelerate the adoption of blockchain-based payment systems but might also introduce new vulnerabilities.
Another layer to this debate involves the political landscape. Some lawmakers have expressed interest in enhancing financial innovation and competition by allowing broader access to Fed services, while others advocate for strict oversight to prevent market disruptions. The outcome of Custodia’s legal challenges may influence future legislative efforts around fintech and crypto regulation.
Ultimately, the Custodia case serves as a litmus test for how far the U.S. financial system is willing to adapt to blockchain-based innovation. While the rejection represents a significant hurdle, it also brings into focus the critical dialogue between innovation and regulation—a dialogue that will shape the future of finance in the coming decades.