The Trump administration’s green light for national banks to offer custody services for cryptocurrency will likely drive a new wave of financial technology partnerships to tackle significant cybersecurity and operational challenges.
In a recent letter, the Office of the Comptroller of the Currency called virtual currency custody, including safekeeping, settlement and reporting, a modern form of “traditional banking activities.” The agency’s July 22 announcement is the latest move by acting Comptroller of the Currency Brian Brooks, formerly top lawyer at Coinbase Inc., to help the crypto industry integrate into banking’s mainstream.
Collaborations are most likely to occur via partnerships or white label services branded under a bank’s name but actually provided by a crypto custody company, said Kari Larsen, partner at Perkins Coie LLP in New York. Banks also may acquire crypto custody providers, she said.
“The door’s just been opened for funds, institutional players, and investment advisers” to expand their relationships to crypto, Larsen said.
There are a number of regulatory considerations that still need to be addressed for bitcoin or ethereum to be listed alongside stocks and bonds on a bank customer’s monthly statement, practitioners and industry executives said. Keeping cryptographic keys to digital assets secure from hacking, theft, fraud, or loss would be chief among those requirements.
“There’s a reason custody has emerged as its own segment of the crypto industry--safely storing digital assets is very hard to do,” said Jake Chervinsky, general counsel at Compound Labs, Inc., a San Francisco-based cryptocurrency company.
OCC Sees Demand
The OCC’s interpretive letter didn’t specify the cybersecurity measures banks should take to safeguard crypto keys, but said risk management procedures should take account of the “different technical characteristics” of various crypto assets. The agency also said banks should consult with their OCC supervisors before offering crypto custody services.
The agency’s decision to allow banks to hold crypto is “a recognition that tens of millions of Americans are invested in this asset,” Brooks said Thursday at a virtual conference hosted by the American Bankers Association.
The OCC has received questions from a number of banks about holding digital assets, which are owned by an estimated 30 to 40 million Americans, he said
Banks will first need to assess whether there’s enough customer demand to justify the operational and compliance costs that go along with custodial services, Chervinsky said. The stakes are high, too.
“A single mistake can result in customers’ funds being lost forever,” he said.
Crypto companies like Coinbase that offer a full suite of custody services to customers--including handling fiat currency--must obtain money transmitter licenses on a state-by-state basis.
New York-regulated crypto companies must meet requirements to securely store digital assets, such as holding the same type and amount of virtual currency obligated to a customer. There are also cybersecurity requirements to protect customer data, confidentiality, and detect attempts to hack into accounts.
Crypto companies that already hold a trust company charter or a “Bitlicense” from New York’s Department of Financial Services, are likely to have a leg up in working with banks on custody services that can meet the OCC’s regulatory and supervisory requirements for custody services, said Kari Larsen, partner at Perkins Coie LLP in New York.
The OCC’s move should also make it easier for crypto companies to get bank accounts and other bank services. Many banks have viewed cryptocurrency companies as high-risk customers due to anti-money laundering and Bank Secrecy Act compliance concerns.
“I’m hoping this lowers the perceived riskiness for banks” to offer services to crypto firms, said Charles Cascarilla, chief executive officer of Paxos, a cryptocurency trust company. “You need to have bank accounts in order to be in the financial system.”
National banks aren’t the only ones who may now want to bank crypto.
State-chartered banks, particularly “challenger banks” that have positioned themselves as service providers to the fintech industry, are likely to ask the Federal Deposit Insurance Corp. to take similar action as the OCC, said Peter Luce, partner at Ketsal PLLC, based in Washington.
Without the FDIC’s blessing, smaller banks are reluctant to deal with the uncertainty that comes with supporting crypto custody and wallet services, Luce said.
“It would not surprise me if the FDIC hasn’t already received opinion letter requests like this from state banks,” he said. “These aren’t new issues; for years, all the real action in crypto innovation and banking has been at the state level. The national banks are late to the party,” Luce added.
States in the Lead
The time and effort required for large national banks to scale up crypto holding services and meet OCC requirements mean that states like New York will continue to lead in regulation, said Gary DeWaal, special counsel at Katten Muchin Rosenman LLP in New York.
“The states are going to force you into their ballpark for the time being,” he said.
State regulators see themselves as keeping better pace with the changing financial landscape. And it isn’t just big financial markets like New York.
Wyoming already has two applications for its special purpose depository institution (SPDI) charter, enacted in 2019, intended for crypto companies to provide custody services, Wyoming Division of Banking Commissioner Albert Forkner said by email.
“I could see these institutions fully operational and providing digital asset custody services to a large number of clients” before most national banks have the complete regulatory approvals necessary to launch their own services, he added.