A recent interpretive letter from the Office of the Comptroller of the Currency will smooth the path for U.S. banks seeking to move deeper into the digital assets business.
The OCC letter — Interpretive Letter #1170, Authority of a National Bank to Provide Cryptocurrency Custody Services for Customers1— clarifies that “a national bank may provide cryptocurrency custody services on behalf of customers,” including the “holding of unique cryptographic keys associated with cryptocurrency.” The letter also reaffirms that national banks can provide banking services to cryptocurrency businesses “so long as they effectively manage the risks and comply with applicable laws.”
We think the OCC letter has the potential to accelerate the wider adoption of digital assets, as it clarifies the OCC’s position on certain bank activities related to digital assets. The letter also raises many questions about how banks and other existing custodians of digital assets will meet federal requirements to demonstrate compliance with financial crimes, consumer protection, and safety and soundness standards and controls.
To satisfy these requirements, banks that decide to offer digital assets custody services will have to develop a risk and compliance framework specific to digital assets, based on a thorough identification of digital assets-specific risks, industry best practices, and existing regulatory expectations. The contours of the framework required will vary depending on whether a bank builds or acquires its own platform or partners with established digital assets custodians. In any event, we think banks should consult with their primary regulator early in the process.
Meanwhile, digital assets firms interested in bank charters should consider the costs, benefits, timing, and application process associated with different charter and licensing options (such as national vs. state charter). Likewise, we believe would-be banks should also consider the ongoing regulatory costs associated with maintaining a risk and compliance framework that satisfies the requirements and expectations specific to bank regulation and federal or state bank supervisory programs.
Permissibility of Cryptocurrency Custody Services
The OCC letter specifically addresses digital asset custody services — primarily the custody of a customer’s private keys. A private key is a computer file that demonstrates “possession” of Bitcoin or other digital asset. While private keys may be held on the asset owner’s device, they are often held by a centralized institution, such as an exchange or custodian.
The digital assets market has grown from less than $13 billion market capitalization2 in the beginning of 2014 to more than $300 billion as of publication.3 However, the growth of digital assets has been constrained by concerns about security of existing custody firms, regulatory uncertainty around permissible activities for bank custodians, and challenges facing digital assets firms in establishing correspondent bank relationships to facilitate holding and transfer of fiat currency.
Additionally, many institutional investors have been restricted from participating in digital assets because of a lack of investment-grade custody firms, or “qualified custodians.”4
The OCC letter helps resolve the uncertainty around permissibility for bank custodians. In basic terms, the OCC letter makes clear that cryptocurrencies can be among the customer assets held for safekeeping by a national bank’s custody business. The letter specifically notes that national banks may provide various cryptocurrency-related custody services such as, “facilitating the customer’s cryptocurrency and fiat currency exchange transactions, transaction settlement, trade execution, recordkeeping, valuation, tax services, reporting, or other appropriate services.” Though the OCC letter only mentions cryptocurrency, we think its publication suggests the possibility that banks could custody other types of digital assets, such as the anonymity-enhancing digital assets known as “privacy coins.”
The impact of the OCC letter will reach beyond OCC-regulated national banks and thrifts, in our view. Many states have parity or “wild card” laws automatically giving state-chartered banks any powers granted to national banks. Legislators and regulators in other states will also doubtless take note of the OCC letter in interpreting or defining the powers granted under state bank charters.
The OCC letter does not specifically address the permissibility of many digital assets activities aside from custody, including the issuance of stablecoins,5 use of stablecoin-like networks as payment and settlement rails, digital assets lending, or digital assets derivatives activity. However, we think there is reason to expect that many such activities also will be deemed permissible and some may be the subject of future OCC letters or guidance.
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