Fed Scraps 2023 Crypto Banking Ban That Blocked Crypto Bank Custodia

The Federal Reserve withdrew its 2023 policy statement that effectively barred banks from crypto activities and denied Custodia Bank’s master account application.

The move comes as Wyoming-chartered Custodia pursues a full-court appeal of its master account denial, while regulatory agencies expose widespread debanking practices that systematically excluded crypto firms from traditional banking services between 2020 and 2023.

Vice Chair for Supervision Michelle Bowman said the policy shift creates pathways for responsible innovation while maintaining safety standards.

“New technologies offer efficiencies to banks and improved products and services to bank customers,” she said.

The original 2023 guidance had limited state member banks to activities permitted under other federal banking regulations, but evolving financial systems and improved regulatory understanding rendered those restrictions obsolete.

Custodia Escalates Legal Battle After Years of Regulatory Roadblocks

Custodia filed a petition with the Tenth Circuit Court of Appeals on December 15, requesting en banc review of the Fed’s denial of its master account after a three-judge panel upheld the rejection in October.

The bank argues the decision violates the Monetary Control Act’s mandate that payment services “shall be available” to eligible depository institutions, creating unconstitutional veto power over state banking charters.

Without master account access, Custodia cannot use Federal Reserve wire transfers or automated clearinghouse systems despite meeting all statutory requirements under Wyoming’s Special Purpose Depository Institution framework, which requires 100% reserve backing and prohibits lending to reduce risk.

The petition raises federalism concerns about federal regulators effectively overriding Wyoming’s 2020 charter decision, which was designed to attract digital asset companies within stringent safety parameters.

Back in November, Judge Timothy Tymkovich’s dissent highlighted that granting unreviewable discretion to regional Reserve Bank presidents raises constitutional questions, since those officials are selected by private bank directors rather than appropriately appointed as federal officers.

The dissent created a 2-2 split among circuit judges on whether the Monetary Control Act mandates master account access, with Tymkovich writing that the Fed’s interpretation grants unreviewable discretion while contradicting the statute’s plain language.

The Kansas City Fed denied Custodia’s application in January 2023 after 27 months, citing crypto-asset risks despite internal documents showing staff deemed the bank’s capital adequate and its executive team impressive.

Federal Reserve Governor Christopher Waller has since acknowledged the Fed possesses sufficient tools to manage risks through tailored account structures without resorting to blanket denials.

His October remarks undermined the necessity argument that regulators used to justify rejecting Custodia’s application, while broader investigations revealed systematic exclusionary practices across major banks.

Banking Giants Exposed for Inappropriate Crypto Restrictions

The Office of the Comptroller of the Currency released findings showing all nine largest national banks imposed inappropriate restrictions on lawful businesses, including digital asset companies, between 2020 and 2023.

JPMorgan Chase, Bank of America, Citibank, Wells Fargo, U.S. Bank, Capital One, PNC, TD Bank, and BMO maintained internal policies requiring escalated approvals or blanket restrictions on sectors conflicting with institutional values.

The review examined thousands of debanking complaints after President Trump signed an August executive order intended to prevent account closures based solely on crypto activity.

OCC Comptroller Jonathan Gould said the practices were widespread and represented improper use of national bank charters.

Some users claimed their accounts were abruptly closed under vague references to concerning activity, fueling allegations of coordinated exclusion similar to Operation Chokepoint.

Banks insisted they did not discriminate, but many restrictive policies were publicly visible throughout the investigation period.

The regulatory shift extends beyond debanking investigations.

The OCC conditionally approved five crypto firms, including Circle and Ripple, to launch national trust banks in December, giving digital asset companies access to federal banking charters with single-rulebook oversight instead of navigating state-by-state regulations.

Paxos received federal supervision to issue stablecoins, while Ripple’s charter excludes RLUSD issuance but allows custody and settlement services without deposit-taking or lending activities.

The approved firms have 18 months to raise capital, assemble staff, and build compliant infrastructure before facing final OCC examination.

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